Building a Financial Cushion for Your Law Firm
Every law firm can benefit from a financial cushion. A financial cushion is not just a “rainy day fund” to be set aside for emergencies. Successful law firms maintain cash reserves so they can take advantage of strategic opportunities and keep daily operations running smoothly during dips in cash flow.
Many firms use their cash reserves to:
· Purchase new technology or equipment
· Take advantage of strategic opportunities
· Cover payroll when business slows down or payments get delayed
How Much Should a Law Firm Keep in a Cash Reserve?
The first step in building a cash reserve is establishing a goal. Without a clear goal, it’s impossible to plan effectively.
Law firms are recommended to have 3-6 months’ worth of operating expenses in a cash reserve.
To determine the optimum amount for a cash reserve for your firm, factor in any periodic or seasonal expenses. The objective is to determine how much money you will need to cover your full monthly overhead during any time of the year, including when those periodic or seasonal expenses arise.
Practical Steps for Building a Cash Reserve
Building your cash reserve is feasible if you take a structured approach.
Here’s how to get started:
Small – But Consistent – Monthly Contributions
Focus on putting a smaller but consistent amount each month into your reserve fund. If you receive occasional larger revenue deposits, consider adding a percentage of those larger amounts to your reserve fund.
Limit Partner Bonuses Temporarily
To keep your monthly contributions consistent, partner bonuses may need to be limited until you reach your target cash reserve.
Automated Account Transfers
It’s important to set up an automatic monthly transfer from your operating account to your reserve account, rather than trusting yourself to transfer the money manually.
Review and Adjust Periodically
Review your target cash reserve on a quarterly basis, and determine whether your monthly overhead is increasing. If it is, you may need to raise your reserve target to align with your firm’s expense forecast.
A strong cash reserve helps law firms prepare for uncertainties. If you’re ready to run your firm with more clarity, control, and confidence, the next step is a conversation.
In addition to being a licensed attorney, our founder has decades of experience as a CEO and turnaround consultant as well as a proven track record translating complex financial concepts into practical guidance. Let’s set up a consultation to see if our knowledge and experience helping law firms can yield similar results for your firm’s financial health.
