14 Jul When will your firm run out of cash?

The economically challenging times we are experiencing are the result of things outside our control. However, there is one question we are consistently being asked, ‘How do I know when the money will run out?’ or ‘How can I calculate how much time I have before we are out of cash?’ …. These questions or a variation of these questions are front of mind for many managing partners and small law firms.

The question comes down to; how can I track the cash movement into and out of my firm?

If you have been running your firm primarily from your profit & loss statement, you have not been tracking the movement of cash. There are many ways money comes into a firm; the revenue earned through practicing law is only one way. It is also the only one listed on your profit & loss statement.

It is a similar case for expenses. Many are listed on your profit & loss statement, and several are listed on your balance sheet.

There are also loan payments and credit card payments not listed on your profit and loss statement.

So what report will show the movement of cash coming into and going out of your firm? It’s called a cash flow statement or a statement of cash flow. I would argue it is an essential report to review every month. Why, because a firm can fail, go bankrupt or have to close its doors because they ran out of cash, even though the profit & loss shows a profit.

Let me rephrase. Your firm can run out of cash, and your profit & loss report correctly shows you have net income.