Tracking Your Money & Keeping Records

Understanding Cash Flow

Cash flow is the movement of money into and out of a law firm. It is different from profit. A firm may have profitable matters on paper but still lack cash to pay lawyers, staff, rent, malpractice insurance, and vendors. The timing of collections matters. If clients pay slowly while payroll is due every two weeks, the firm can face pressure even when its case pipeline looks strong.

Think of the firm as a trust-and-operating-account system. Client funds held in trust do not belong to the firm and must never be treated as operating cash. Earned fees should be moved from trust to the operating account only when permitted by the engagement agreement, applicable rules, and accurate billing records. A cash review must therefore separate operating cash, accounts receivable, and client trust funds.

The Importance of Basic Records

Accurate records give you a reliable view of the firm's financial health. Track every billable hour, invoice, payment, write-off, expense, vendor bill, payroll payment, and trust-account transaction. A clean ledger helps you understand your collection rate, forecast payroll, review profitability by practice area, and prepare accurate tax and compliance reports.

At a minimum, reconcile the operating bank account, credit-card account, and trust account on a regular schedule. Trust accounting deserves special care. Record the client, matter, amount received, purpose of the funds, and every authorized disbursement. Never use one client's trust money to pay another client's bill. If your jurisdiction requires a three-way reconciliation, complete it and retain the supporting records.

Real-World Scenario

Consider a five-lawyer family law firm. In March, lawyers record 620 billable hours and send $145,000 in invoices. The firm's realization rate is only 78% because of discounts and write-downs, and clients pay invoices slowly. The collection rate falls to 70%. At the same time, the firm receives $40,000 in retainers that must remain in trust until earned. The owner sees $185,000 in bank activity and assumes the firm can hire another associate.

That conclusion may be wrong. Much of the money is restricted client funds, not operating revenue. The firm may also have $40,000 in unpaid vendor bills and payroll due before the next collection cycle. A weekly cash report would show the true operating balance, expected collections, upcoming obligations, and funds that cannot be used for overhead.

The Bootstrapper's Ledger

The Bootstrapper's Ledger is a simple weekly method for firms that are not ready for a complex finance system. Use one worksheet with separate sections for operating cash received, operating cash paid, accounts receivable expected, and trust-account activity. For each receipt, identify the client or matter and whether the money is an earned fee, an advance payment, a reimbursement, or a retainer held in trust.

At the end of each week, calculate beginning operating cash plus operating receipts minus operating payments. Then list payroll, taxes, rent, software, insurance, expert fees, and other commitments due during the next 13 weeks. Do not include trust funds in the operating cash total. This gives you a practical cash runway: available operating cash divided by average weekly operating cash outflow.

Forecasting and Decision Making

A 13-week cash forecast helps you make safer decisions about hiring, advertising, contingency matters, office space, and technology. Include realistic collection dates, not just invoice totals. Separate fixed costs from matter-related costs, and mark invoices that are overdue. Review utilization rate, realization rate, and collection rate alongside cash flow. High billable hours do not help if time is written off or clients do not pay.

For example, if the firm has $120,000 in usable operating cash and average weekly operating outflow is $20,000, the basic runway is six weeks. If expected collections are $45,000 but only $25,000 is likely to arrive within 30 days, plan from the lower figure. Delay a nonessential hire, contact overdue clients, and review payment plans before cash becomes a crisis.

Conclusion

Strong financial records let a law firm protect client funds, meet obligations, and choose growth from a position of fact. Review operating cash weekly, reconcile trust accounts carefully, track billable-hour performance, and forecast collections before committing to new spending. The goal is not complicated accounting. The goal is knowing what money is available, what money is restricted, what is owed, and what will happen next.