What is a cash-flow analysis?

Most small businesses, including law firms, go out of business in the first five years due to poor cash flow management.^[1] One method law firms can implement to manage their cash flow better is to perform a cash-flow analysis. In a cash-flow analysis, your firm determines how much cash it had on hand during a specific time period and then identifies where it spent its money during that same time period.^[2] This analysis allows you to determine whether your firm has enough money to meet its current expenses such as payroll, rent, office supplies, etc.^[2]

The easiest way to perform a cash flow analysis is to use bookkeeping software that can prepare a cash flow statement based on your bank records.^[3]

Entering or uploading your bank account data into your bookkeeping software on a daily basis will allow you to print this report daily and monitor your cash levels on a real-time basis.^[3] If your firm has excess cash on hand, it might be smart to put it aside to cover upcoming expected gaps in revenue, or to invest in the firm’s infrastructure. If your firm does not have enough cash on hand to meet its obligations, then your firm might need to obtain a loan to get through the slow down in incoming revenues.^[2] In either case, performing a cash-flow analysis can help your firm to manage its cash flow better, which will allow it to meet its expenses even in months where legal fee revenues temporarily fall.

References

1. Managing and improving the cash flow of small law firms
2. The Ultimate Guide to Cash Flow Analysis
3. Managing and improving the cash flow of small law firms