Key Takeaways:
• The statement of cash flows bridges the gap between your income statement and balance sheet, showing exactly how cash moves through your firm during a specific period—critical for law firms where timing of payments can vary significantly
• QuickBooks Online streamlines cash flow reporting with built-in templates and automatic categorization, but law firms need to customize settings to properly track trust accounts, retainers, and contingency fees
• Mid-sized law firms that actively monitor cash flow statements collect 32% more monthly revenue than those without proper cash management systems, according to recent industry data
If you’re managing a mid-sized law firm, you’ve probably experienced this scenario: Your profit and loss statement shows healthy revenue, your client roster is growing, yet you’re scrambling to make payroll or cover operating expenses. Sound familiar? You’re not alone—and the solution lies in understanding your statement of cash flows.
The statement of cash flows, sometimes alternatively referred to as the cash flow statement, shows law firms where the cash is coming in and where it’s going. While your income statement tells you about profitability and your balance sheet shows what you own and owe, the cash flow statement reveals the actual movement of money through your practice—information that’s crucial for law firms operating on different billing models.
Why Cash Flow Statements Matter More for Law Firms
Unlike other businesses, law firms face unique cash flow challenges. Calculating cash flow gets a little tricky since you’re not necessarily paid when the work is done, but after the client pays the invoice. Add in trust accounting requirements, varying payment terms, and the mix of hourly, fixed-fee, and contingency matters, and you’ve got a complex financial picture that demands careful monitoring.
Recent data underscores this importance: Firms that use payment plans collect 49 percent more monthly revenue per lawyer. But you can’t optimize what you don’t measure, which is where your cash flow statement becomes indispensable.
Understanding the Three Components of Your Law Firm’s Cash Flow
Your statement of cash flows breaks down into three essential sections, each telling a different story about your firm’s financial health:
1. Operating Activities
This is where most of your law firm’s action happens. Operating activities include:
- Client payments received
- Salary and benefit payments
- Office rent and utilities
- Technology subscriptions and software costs
- Marketing expenses
For law firms, this section requires special attention to timing differences. The operating activities section reflects the cash flows resulting from a company’s core business operations.
2. Investing Activities
While typically smaller for law firms, investing activities might include:
- Purchase of new computers or office equipment
- Investment in practice management software
- Buying or selling office property
- Long-term investments in technology infrastructure
3. Financing Activities
This section covers:
- Partner capital contributions or distributions
- Loan proceeds or repayments
- Line of credit activity
- Dividend payments to shareholders
Setting Up QuickBooks for Accurate Law Firm Cash Flow Reporting
QuickBooks Online has made generating cash flow statements remarkably straightforward, but law firms need to ensure proper setup for accurate reporting. Here’s your step-by-step guide:
Step 1: Configure Your Chart of Accounts
Before running any reports, ensure your chart of accounts reflects law firm-specific needs:
- Separate operating accounts from trust accounts
- Create specific categories for different fee types (hourly, fixed, contingency)
- Set up proper expense categories that align with law firm operations
Step 2: Access the Cash Flow Statement
From the dashboard, click on the Reports tab on the left sidebar. Then search for “Statement of Cash Flows” in the reports library.
Step 3: Customize for Your Firm
You can specify the date range for which you want to generate the Statement of Cash Flows. For law firms, we recommend:
- Running monthly statements for operational decisions
- Quarterly statements for partner meetings
- Annual statements for strategic planning
Step 4: Adjust Account Classifications
QuickBooks automatically classifies general ledger accounts into “Operating,” “Investing,” or “Financing” based on the account type. Review these classifications to ensure trust accounts and retainers are properly categorized.
Learn more about LeanLaw’s QuickBooks integration to streamline this entire process.
Critical Customizations for Law Firm Cash Flow Statements
Trust Account Considerations
When you take possession of client money, such as settlements or retainers, this account is required to segregate and account for their funds. Your cash flow statement must clearly separate:
- Client trust funds (which aren’t your money)
- Earned fees transferred from trust
- Operating account balances
Handling Different Billing Methods
Mid-sized firms often use multiple billing approaches. Your cash flow statement should account for:
Hourly Billing: Track when time is worked versus when it’s billed and collected Fixed Fees: Monitor upfront payments versus work performed Contingency Matters: Plan for irregular, large cash inflows
Managing Work in Progress (WIP)
Your unbilled time and expenses represent future cash flow. While WIP doesn’t appear directly on the cash flow statement, monitoring it helps predict future cash positions. Using comprehensive reporting tools can help you track WIP alongside your cash flow data.
Using Cash Flow Data to Make Strategic Decisions
Identifying Cash Flow Patterns
Review your statements to spot trends:
- Which months typically see the highest collections?
- When do major expenses hit?
- How long is your average collection cycle?
Firms that accept online payments get paid up to 39% faster, making it a very effective tactic for boosting billing efficiency.
Planning for Growth
Revenue increased an average of 11.4% during the first six months of 2024 compared with the same period last year, driven by billing rate and demand growth. Use your cash flow statement to:
- Determine if you can afford new hires
- Plan technology investments
- Evaluate office expansion options
Managing Seasonal Fluctuations
Many practice areas experience seasonal variations. Your cash flow statement helps you:
- Build reserves during high-collection months
- Plan for lean periods
- Negotiate better payment terms with vendors
Best Practices for Law Firm Cash Flow Management
1. Regular Review Schedule
Don’t wait for year-end to review your cash flow. Successful firms:
- Review cash flow weekly at the operational level
- Analyze monthly statements with management
- Present quarterly reports to partners
2. Integrate with Other Financial Tools
Your cash flow statement should work in harmony with:
- Accounts receivable aging reports
- WIP reports
- Budget variance analyses
- Client profitability reports
3. Set Up Cash Reserves
You’ll want to save 40% of your forecasted taxable income in a separate tax account, over and above the 10 percent to 30% that you have in the cash reserve.
4. Leverage Technology
Modern law firms are investing heavily in financial management tools. Firms will continue to invest strongly in technology. Consider:
- Automated billing reminders
- Online payment portals through integrated payment solutions
- Real-time financial dashboards
- Integrated time and billing systems
Common Cash Flow Mistakes to Avoid
1. Confusing Profit with Cash
A profitable firm can still face cash crunches. Remember: Profit refers to the difference between revenue and cost over a period of time, whereas cash flow measures your cash on hand.
2. Ignoring Collection Metrics
Collection rate determines collected dollars divided by billed dollars, showing strong performance at an industry average of 91%. If your collection rate falls below this benchmark, investigate immediately.
3. Poor Expense Timing
Coordinate major purchases with cash inflows. Use your cash flow forecast to plan:
- Annual insurance payments
- Technology upgrades
- Marketing campaigns
- Bonus distributions
4. Neglecting Trust Account Reconciliation
Commingling funds or withdrawing funds for billable work before clients are billed are huge ethical issues and may be subject to discipline or fines.
Advanced Cash Flow Strategies for Growing Firms
Implementing Cash Flow Forecasting
Move beyond historical reporting to predictive analysis:
- Use QuickBooks’ cash flow planner
- Factor in your matter pipeline
- Account for known future expenses
- Build multiple scenarios (best case, worst case, most likely)
Optimizing Billing and Collection Processes
Firms that accept online payments get paid up to 39% faster. Additional strategies include:
- Offering payment plans for larger matters
- Implementing evergreen retainers
- Automating invoice delivery
- Setting up recurring billing for applicable services
LeanLaw’s matter management features can help automate many of these processes, ensuring consistent cash flow.
Creating Department-Level Cash Flow Visibility
For larger mid-sized firms, consider:
- Departmental cash flow reports
- Practice area profitability analysis
- Individual attorney contribution metrics
- Client-level cash flow tracking
Putting It All Together: Your Cash Flow Action Plan
- Week 1: Set up or review your QuickBooks chart of accounts for proper cash flow categorization
- Week 2: Generate your first cash flow statement and identify any classification issues
- Week 3: Create a cash flow review schedule and assign responsibilities
- Week 4: Implement at least one cash flow improvement strategy (online payments, payment plans, etc.)
Remember, Using reports to back up your decision-making will go a long way in helping you optimize your cash flow.
The Bottom Line
Your statement of cash flows isn’t just another financial report—it’s your firm’s financial GPS. In an industry where average demand growth among firms hit 2.6% in 2024, maintaining healthy cash flow separates thriving firms from those merely surviving.
By mastering your cash flow statement in QuickBooks and implementing the strategies outlined above, you’ll gain the financial visibility needed to make confident decisions, weather economic uncertainties, and position your firm for sustainable growth.
The legal industry is evolving rapidly, with AI tools to streamline processes, enhance productivity, and improve efficiency in tasks such as document review, legal research, and case management. But regardless of how technology transforms practice delivery, cash remains king—and understanding your cash flow statement remains fundamental to your firm’s success.
Frequently Asked Questions
Q: How often should I review my law firm’s cash flow statement?
A: While QuickBooks can generate cash flow statements for any period, best practice for mid-sized law firms includes weekly operational reviews, monthly management analysis, and quarterly partner presentations. During growth periods or economic uncertainty, consider increasing review frequency.
Q: What’s the difference between cash basis and accrual basis cash flow statements?
A: For law firms using cash-basis accounting, the statement closely aligns with the income statement. However, in accrual-basis firms, it provides a distinct view of actual cash movement, separate from reported income and expenses. Most mid-sized firms use accrual accounting for better financial insight.
Q: How do I handle trust account transactions in my cash flow statement?
A: Trust account activity should be carefully segregated. Client funds held in trust don’t appear as cash inflows in your operating activities until earned and transferred to your operating account. QuickBooks allows you to exclude trust accounts from your firm’s cash flow statement while maintaining separate trust account reports for compliance.
Q: Can QuickBooks automatically categorize my law firm’s transactions for cash flow reporting?
A: QuickBooks automatically classifies general ledger accounts into “Operating,” “Investing,” or “Financing” based on the account type. However, law firms should review and adjust these classifications, particularly for trust accounts, retainers, and specialized expense categories.
Q: What cash flow benchmarks should my mid-sized law firm target?
A: While benchmarks vary by practice area, successful mid-sized firms typically maintain: 3-6 months of operating expenses in cash reserves, collection rates above 91%, and realization rates of 85% or higher. Your cash flow statement helps track progress toward these targets.
Q: How do contingency fee matters affect cash flow planning?
A: Contingency matters create irregular cash flow patterns with potentially long periods between case initiation and payment. Your cash flow forecast should account for the expected timeline of contingency cases, win rates, and potential settlement amounts while maintaining adequate reserves to cover ongoing operations during collection gaps.
