Whenever I start a finance workshop with Partners, especially Managing Partners I ask the delegates what their most pressing issues are.
Invariably the most common concern is cash flow. Thriving growing firms can find it difficult to fund their growth whilst the less successful find it hard to cover their costs.
Why is this always so pressing?
At its simplest law firms focus on a single measure -profitability. All the public comparisons and most internal documents focus on profitability. Reliance on a single metric is like a one-legged stool. However large and strong, it is liable to fall over!
Accountants use three measures to monitor business health – Profit, Balance sheet and Cash flow.
As the American writer Ed Reeser said a few years ago “Every major American law firm which has gone under in recent years had plenty of profit until the day it died – it is a lack of cash which kills law firms – not lack of profit “.
And yet, few law firms give any prominence in their management information to cash flow analysis, and the forward-looking cash projections. Too much attention is focused on profit not enough on cash flow.
After all there is much truth in the old saying “Turnover is vanity, Profit is Sanity, Cash is Reality “.
