Cash Management For Law Firms: Your Guide To Growing Your Profit in 2022

While there are many businesses that perform very well and are continuously profitable, 20% of small businesses fail in the first year, 50% go belly up after five years, and only 33% make it to 10 years or longer, according to the Small Business Administration (SBA). ¹

Sadly, it's not uncommon for a company to be cash-starved and in debt. It's also not uncommon for business owners to try to ignore the problem for as long as possible. This is unfortunate because if you're running your business this way, then you're risking your company's long-term success because the one truth in any business of any age of any size in any industry is that cash is king.

So, how do you increase your profits, and thereby cash, without making any additional sacrifices? By implementing a proven, repeatable, and predictable cash management strategy, you are guaranteed to take your business to the next level.

If you want your business to thrive and grow without financial worries, read on.

Profit First?

Wouldn't it be great if your business was always profitable? Wouldn't life be easier if there were never any emergencies or surprises that caused debt?

Written by Mike Michalowicz, the book "Profit First" will teach you how to set up your business finances and budgeting by following the four core principles of Profit First.

But first, let me shift gears for one minute and talk about diets. I promise this will link back to growing a healthy business!

In the last 100 years, the standard plate size has increased by over 20%. This increase has encouraged people to eat more. Which has led to unintended weight gain.

To lose weight, many common diets would encourage you to:

1. Use Small Plates.

   Using smaller plates starts a chain reaction. When you use this smaller plate, your portions get cut in half and it means that taking the time to enjoy each bite more than usual- without feeling guilty about eating less food actually helps curb cravings for unhealthy foods!

2. Serve Sequentially. 

   Eating your vegetables first will make you feel fuller for longer. When it's time to move on to your mashed potatoes, there is less of an urge to overeat the lesser nutritious food.

3. Remove Temptation. 

   The best way to get rid of temptation is by removing it from your house. I find that when there are bags or boxes of junk food sitting in the kitchen, they call out constantly even if you're not hungry at all! But if I only have healthy food in the house, I will munch on the healthy stuff if I'm truly hungry.

4. Enforce a Rhythm. 

   Instead of waiting until you are hungry to eat, make sure your diet consists of healthy food in order not only to feel satisfied but also to be better equipped for any challenges that life may throw at you. An eating schedule based on eating regularly, it'll help eliminate hunger pangs by lessening the intensity with which they kick into gear - meaning more control to make better eating choices on a consistent basis and to not overstuff yourself because you feel starved.

So, how does this relate to a healthy business?

1. Parkinson's Law (aka Small Plates). 

   In 1955, philosopher C. Northcote Parkinson defined Parkinson's Law: the demand for something expands to match its supply. If a prospect asks for a proposal to be delivered in one week, you'll get it delivered in one week. But, if they ask for it to be delivered in one day, you'll make that happen too. That's Parkinson's Law.

2. The Primacy Effect (aka Serve Sequentially).

    
   The principle of the Primacy Effect is that we place additional significance on the things we encounter first. I'm going to describe two people: a saint and a sinner. Quickly review the following words and tell me who is who.
   
   (A) evil, hate, anger, joy, care, love
   (B) love, care, joy, anger, hate, evil
   
   At first glance, you most likely determined the sinner is (A) and the saint is (B). But, go back and look at the words; they are identical but in reverse order.
   
   Why does this matter? The conventional accounting formula is Sales - Expenses = Profit. But, why is profit last? When profit comes first, it is not forgotten: Sales - Profit = Expenses.

3. Remove Temptation. 

   Money works the same way as junk food. When money is out of sight, it's out of mind. You won't spend money that you don't see. You'll make do with the money you know you have immediate access to.

4. Enforce a Rhythm. 

   Money never just magically appears in your bank account. But, if you have a repetitive process around your cash flow, you will tame the peaks and valleys which lets you avoid spending sprees when you have a big deposit as well as not panicking if you have no deposits for a few days.

This way of running your company not only saves your business from going under but also helps you grow through better decision-making and increased profits.

Why should I implement Profit First?

Many business owners struggle to keep their businesses afloat, and one of the main reasons for this is a lack of financial discipline. Implementing Profit First can help to change this by ensuring that you are making money each month - even in lean times.

Here is a list of reasons why you should consider implementing Profit First in your business:

1. Profit First helps you focus on the most important thing: making money. 
   

   We all know how it goes. Your business is growing, and you're doing more for your customers. You're hiring new staff members and looking to expand into a larger office space or opening a satellite office in a new city. And as that growth continues to happen, something critical often gets lost in the shuffle: profits!

2. It ensures that you have a steady flow of cash coming in, no matter what else is happening in your business. 
   

   Most businesses, whether they're large or small, experience ups and downs in sales. This is completely normal, and to be expected. But even during your company's "down" times, you still need to have a steady flow of cash coming in to pay the bills. It's crucial that you have a solid financial foundation so that your business can weather any storm.

3. It teaches you how to manage your finances so that you can grow your business sustainably. 

   I'm not going to lie, it's hard to get your head around the idea of cash management. It can seem like a big, scary beast that you're never really sure if you're doing right by. But I've got good news for you! You don't need to be an accountant or have a degree in finance because there are some simple tips and tricks that will help get your finances sorted out in no time at all (seriously). Profit First calls out some longstanding traditional financial management concepts taught in business classes and business books that are most likely the reason why business finances are so confusing.

4. To ensure that, as we build profits, we protect tax dollars, so that the client need not sweat future tax bills. 

   How much do you hate when your tax preparer contacts you each quarter with your updated quarterly estimated tax payment amount? I'm sure the first thing you do is check your bank balance and groan when there's not enough to make the tax payment.
   
   Or worse, when you learn that you have overpaid your taxes for the year and desperately need the money back, but you need to get your tax return filed in order to get the large overpayment refunded to you and the earliest your tax preparer can work on your taxes is still 3 months away.

If these are things that sound appealing to you, then Profit First is definitely worth considering!

The benefits of Profit First

Ever feel like you can never get ahead? You're always playing catch-up. One month you make a little more than you spend and next month it's back to zero.

There's no question that it's tough to get ahead in business (or life). But what's even tougher is figuring out why it seems so hard. Some people seem to have everything handed to them on a silver platter, while others work their butts off and still can't seem to make a difference. So what's the deal? Why is it so hard to get ahead?

It doesn't have to be this way. Profit First is a system that helps your business become profitable so you can stop chasing money and start living life on your terms.

I get it. Most entrepreneurs don’t have the time or gumption to read the different accounting statements necessary to manage the financial aspect of their business. Theoretically, you should review your financial statements monthly (or more frequently), but few entrepreneurs do. Most resort to “bank balance accounting,” where we check our bank balance every day and make financial decisions based upon what we see.

Many entrepreneurs try to force themselves to become better at accounting and to become more disciplined in their fiscal management by pure willpower. But just like a muscle, willpower can be drained. And in a moment of financial stress or bigger than expected expenses the entrepreneur will break their own fiscal rules and spend the money they have. The Profit First principle does not try to change your habits (that is nearly impossible to do), Profit First works with your existing habits. By first allocating money to different accounts, and then removing the temptation to “borrow” from yourself, your business will become fiscally strong and you will benefit from regular profit distributions.

With Profit First:

• You Are Immediately Profitable

Unfortunately, the entrepreneur life is associated with a tired cliche. The notion that business owners must work hard and grind for years before seeing a return is prevalent. It's also incorrect.

• You Become Vigilant About Expenses

When you use the standard formula Sales - Expenses = Profit, it's easy to believe every expenditure is required. Suddenly, you discover that there is no profit left.

When you flip the equation to Sales - Profit = Expenses, you notice that your operating expense account is limited. You become strategic in cutting costs when you have a specific amount to work with.

• You Stay In Contact with Your Money

Many business owners are scared of their finances. They dread looking at their bank account because they are unsure how much money will or will not be available.

Playing ostrich and burying your head in the sand won't help you grow your business or attain success. You'll feel more powerful to make decisions that aid your firm's growth if you stay in touch with your money on a regular basis.

• You Are Ready for Growth Opportunities

By developing a profit account that is growing consistently, you gain more flexibility to invest in new prospects.

You may have your eye on a high-quality training program that you could buy without having to put any more money on your credit card. (Of course, earning miles on a credit card is fantastic. Just make sure you pay off the entire balance each month). Or maybe you want to invest in a better CRM to help grow your company's capacity to take on more customers.

The key to successful growth is always having accessible cash exactly when you need it.

How to implement Profit First

I hear it all the time, "I know I should be doing this but I don't have a clue how to get started." It's understandable. You've been running your business for years and you're good at what you do. Why change?

If you want more money in the bank account every month, then let me show you how to implement Profit First starting today!

This is not an accounting system - this is a mindset shift that will change the way you think about your business forever.

In fact, it's so powerful that many who implement Profit First find themselves saying "What was I thinking before?" And best of all - there are no complicated formulas or spreadsheets involved!

Frequently asked questions about Profit First 

• More bank accounts will result in a lot more bookkeeping work. Is Profit First really worth the effort?

  
  The additional bookkeeping time required to manage and reconcile multiple accounts for Profit First is negligible, and possibly even more efficient than one using just one account. With Profit First, you simply need to reconcile the deposits and periodic transfers from the Income account. All expenses and payments come from the OpEx account.
  
  And all the other accounts are typically a single transfer in on the 10th and another on the 25th, and a single transfer out at those times. It is easy to manage and reconcile. More importantly the Profit First benefits of instantly knowing what money is allocated to what purpose will have profound effects on the financial health of your business.  No excuses. Set up multiple accounts. Do it now!

• Which banks are the best and most flexible in terms of creating multiple accounts (e.g., Income, Profit, Tax, etc.) without charging fees? 

  Profit First readers have had great success with credit unions and community banks. Usually, there are no fees and no balance requirements at credit unions, community banks, and some regional banks. As you set up multiple checking or savings accounts, some bankers will look at your crossed-eyed (because most businesses don't do Profit First.... yet). 
  
  Don't let that phase you, the banker simply doesn’t understand the process. Just set up multiple accounts and make sure that you won't incur fees as a result, even when your balance goes to zero in certain accounts at times. If the bank insists on charging fees and minimum balances, consider a different bank.

• In the book, it presents both basic and advanced Profit First systems. How are they different and which method is better?

  
  The basic method of Profit First suggests establishing four accounts (Profit, Owner’s Pay and Tax) in addition to keeping your current checking account for deposits and to pay bills. If three new accounts feel like too much, you can start with just two accounts: your current checking account and add a Profit account. This basic method is a good way to “ease” into Profit First.
  
  The advanced method of Profit First suggests establishing minimally five accounts: Income, Profit, Owner’s Pay, Tax and Operating Expenses.  Additional accounts are suggested for specific needs (e.g., Payroll account for employees, a Drip account for distributing income over time, etc.).  The advanced method is the superior approach since it separates deposits from any outbound cash flow (writing checks, etc.) and has additional accounts, making it very clear what money is available for what purpose.

• Can I make allocations more frequently or on different days than the 10th and 25th?

  
  Yes. Profit First was designed to be flexible, yet the 10/25 rule is a best practice. The 10th and the 25th are good dates because it achieves a semi-monthly rhythm of accumulating money and then allocating (the cash flow wave). Additionally, when bills are paid on the 10th and 25th they arrive at vendors by the 15th and end of the month, respectively.  This is when bills are typically due. But for some businesses, a weekly rhythm is better. In that case, select the day of the week (e.g. Mondays) to allocate funds from the Income account to the allocation accounts.
  
  Avoid doing the allocation process more frequently than once a week or ad hoc. A highly frequent rhythm or sporadic rhythm makes it difficult to observe the cash flow waves coming and out of the Income account.

• Since the Profit, Owner’s Pay and Tax accounts are all for the benefit of me, the owner of the business, can’t they just be one account instead of three?

  
  No. While the money allocated to these accounts do all benefit the owner(s), the use of the money is distinct. The Owner’s Pay is for the owner’s salary or regular recurring distribution. The Profit account is used as a quarterly bonus (and can also function as a rainy-day fund or used for a “Death to Debt” quarterly distribution.). 
  
  The Tax account is used to pay the owner’s taxes (and corporate taxes). So, while the money does all benefit the owner, the accounts need to be kept separate so that you can instantly tell (by just looking at your bank balance) what money is allocated to what purpose.

• I want to pay as few taxes as possible. Shouldn’t I run up expenses to cut taxes?

  
  That is one of the most damaging myths of money management. Running up expenses to reduce taxes is the same as spending ten dollars to save three, it is very damaging to the business. The goal is to run the business as profitably as possible (that is the only way to achieve financial freedom), and you should work closely with a Profit First Professional to additionally reduce your tax liabilities as much as you can.

• Where do I pull the money from if I don’t have enough money to pay expenses from my Operating Expense account?
  

  This is the “come to Jesus” moment when you follow Profit First.  The moment will come for every business where you don’t have enough money in the Operating Expense account to pay your bills. The rule is this, you may NOT use other money. In fact, this is the moment your business is yelling at you and shaking you saying that you CAN’T afford to continue to carry all these costs and you need to find a better way.  Reduce your costs and find a way to pay what you owe when the next allocation to OpEx comes in... but no matter what you must cut your costs.

• My business has debt. I can’t be profitable until I pay off all my debt.
  

  In fact, the only way to pay off debt (which is simply past expenses that you haven’t paid for yet) is to be profitable. You must currently make more than you are currently spending so that you have current profits. Then you use those profits to pay off your debt (past expenses).

Get started today

As a business owner, you're always looking for ways to get ahead. And while there are countless strategies to choose from, one of the most effective is implementing Profit First today.

Implementing Profit First in your business can be a game-changer. I know it was for me which is why I am a Certified Mastery Profit First Professional!

It will put money back in your pocket, help you focus on what matters most and allow you to sleep at night knowing that your finances are under control.

#cashstuffing # cashstuffingenvelopes #goals #focus #increaseprofit #Profitfirst #Permanentprofitability #Growyourbusiness #Makemoneyworkforyou #Entrepreneur #Financialfreedomstartshere #Entrepreneursrock #luckybitch #chillpreneur #dtfw

¹ Small Business Administration. "Frequently Asked Questions," Page 2. https://cdn.advocacy.sba.gov/wp-content/uploads/2019/09/23172241/Frequently-Asked-Questions-Small-Business-20191.pdf. Accessed December 11, 2021.