Everyone who have ever seen their team lose a close game has heard it. As you get up from your seat and start walking down those narrow stairs you can hear the other fans say it. A man yells, “can you believe that comeback?” “We had them…if we only had another five minutes on the o’clock.” “Time just ran out.”
The problem with this sports fan logic is: you did not have 5 more minutes. You only get the time the game allows. In the end, we will never know what would have happened because the time on the clock ran out. The same rules apply to you firm.
Every year you try to increase your net income (income after expenses.) Obviously, net income is an important metric to focus on every year. However, for lawyers, there is something more important to keep your eye on. A better measure of your firm’s health. If you want to know how strong your firm is, keep your financial anxiety level low, then focus on your Net Cash Flow.
Cash Flow is the movement of cash into or out of your law firm. It shows how your law firm (even if it just you) spends its money and where the money comes from (i.e presumably your fees. Net Cash Flow is the balance of money remaining (in your operating account) after deducting cash outflows (money you take out of your operating account) from cash inflows (money you put into your operating account from fees.) The net cash flow of your firm over a period is equal to the change in cash balance over this period: positive if the cash balance increases (more cash becomes available), negative if the cash balance decreases.
How much money is left in your account every month after you pay your bills? That amount is the oil that keeps the your firm’s engine running. If it runs low then friction occurs. If the friction is not relieved, then the engine fails.
You are on the clock. If fantastic if your accountant predicts that you will net $400,000.00 for year. However, if your cash flow starts to run low in month seven, then the friction starts (and anxiety rises.) In month eight, your are out of cash, can’t pay your bills, then clock has run out. You are out of business. You would have made 400k at the end of the year, if you just had some more time.
Stop + Drink the coffee + Reinvent