It’s January. You’re your enterprise account attempting to determine the best way to make payroll.
You probably did nice work in October. Billed it in November. And you’re nonetheless ready to receives a commission.
In the meantime, hire is due. Yr-end bills are hitting your bank card. Tax funds are coming.
You’re worthwhile on paper. The numbers say you had a superb yr.
However your checking account says in any other case.
I’m Stephanie Everett, founding father of Lawyerist Lab. After serving to a whole bunch of small regulation agency homeowners navigate money circulation crises, I can let you know: this isn’t a income drawback. It’s a lockup drawback. And it’s fixable.
Welcome to lockup—the money circulation drawback that’s quietly killing worthwhile regulation corporations.
What Is Lockup in Regulation Corporations?
Lockup is the time between doing the work and really getting paid for it.
Not the time between sending an bill and getting paid. The time between doing the work and getting paid.
Right here’s what that appears like in most regulation corporations:
Day 1: You do the work
Day 30: You ship the bill (since you invoice month-to-month)
Day 60: Consumer hasn’t paid but, you ship a reminder
Day 90: Cost lastly arrives
That’s 90-day lockup. Your cash isn’t misplaced—it’s simply locked up. In jail. For 3 months.
And through these 90 days, you continue to should:
That is why agency homeowners inform me: “I’m worthwhile, however I’m at all times burdened about cash.”
You don’t have a income drawback. You might have a lockup drawback.
Why Lockup Issues Extra Than Your Revenue Margin
Most regulation agency homeowners concentrate on the incorrect quantity.
They monitor income. They calculate revenue margins. They set billable hour targets.
However they don’t monitor lockup.
Right here’s why that’s an issue:
State of affairs 1: Excessive revenue, excessive lockup
You might have a 35% revenue margin. Glorious.
However your common lockup is 90 days. Which means:
- You probably did $100K of labor in January
- You gained’t see that cash till April
- You continue to should cowl February and March bills
- You’re continually scrambling for money although you’re “worthwhile”
State of affairs 2: Decrease revenue, low lockup
You might have a 25% revenue margin. Not as spectacular on paper.
However your common lockup is 15 days. Which means:
- You probably did $100K of labor in January
- You receives a commission by mid-February
- You may cowl bills with out panic
- Your money circulation is regular and predictable
Which agency is more healthy? Which proprietor sleeps higher at evening?
Lockup determines your money circulation. Money circulation determines whether or not you’ll be able to really run your enterprise with out fixed nervousness.
Revenue margins matter. But when your cash is locked up for 90 days, your revenue margin is irrelevant when payroll is due subsequent week.
The way to Calculate Your Regulation Agency’s Lockup
Right here’s the components most regulation corporations use:
Lockup = (Accounts Receivable + Work in Progress) ÷ Common Every day Income
Let me break that down:
Accounts Receivable (AR): Cash you’ve billed however haven’t collected but
Work in Progress (WIP): Work you’ve achieved however haven’t billed but
Common Every day Income: Your annual income ÷ twelve months
Instance:
Your agency has:
- $45,000 in AR (invoices despatched however not paid)
- $30,000 in WIP (work achieved however not but invoiced)
- $500,000 in annual income
Common day by day income = $500,000 ÷ 365 = $1,370/day
Lockup = ($45,000 + $30,000) ÷ $1,370 = 55 days
Which means on common, it takes 55 days from the time you do work till you receives a commission for it.
Your cash is locked up for nearly two months.
What’s a “good” lockup quantity?
It will depend on your follow space and enterprise mannequin, however listed here are tough benchmarks:
- Underneath 30 days: Glorious money circulation administration
- 30-60 days: Common for many regulation corporations
- 60-90 days: You’re beginning to pressure your money circulation
- Over 90 days: You might have a severe money circulation drawback that can create crises
Most small regulation corporations I work with have lockup between 60-120 days. They’re worthwhile on paper however continually burdened about cash.
4 Methods to Scale back Lockup and Enhance Money Movement
The nice information: Lockup is fixable. Listed here are adjustments that truly work.
1. Invoice Extra Than As soon as a Month
Most corporations invoice month-to-month out of behavior, not technique.
However month-to-month billing means you’re doing 30 days of labor earlier than you even ship an bill. That’s 30 days of computerized lockup earlier than you even begin ready for cost.
What to do as a substitute:
Invoice twice a month (mid-month and end-of-month) or weekly for big issues.
Sure, it’s extra administrative work. However right here’s the maths:
Month-to-month billing:
- Receives a commission on Day 60 (if fortunate)
Bi-weekly billing:
- Common lockup: 30-35 days
You’ve lower your lockup practically in half. Your money circulation simply obtained considerably more healthy.
Professional tip: For big issues or month-to-month retainer purchasers, invoice weekly. This retains money flowing constantly and prevents the “shock giant invoice” drawback that causes cost delays.
2. Change Your Cost Phrases
“Cost due inside 30 days” is normal. It’s additionally costing you money circulation.
What to do as a substitute:
Make cost due upon receipt or inside 10 days most.
I do know what you’re considering: “My purchasers gained’t settle for that.”
Right here’s the factor: Most purchasers don’t really learn cost phrases till there’s an issue. And if you happen to set the expectation from the beginning, most will adapt.
The way to implement this:
In your engagement letter: “Invoices are due upon receipt. Cost is predicted inside 10 days of bill date.”
In your bill: Make it clear on the prime: “Cost Due: Upon Receipt”
In your preliminary dialog: “Simply so you understand, we invoice [weekly/bi-weekly/monthly] and cost is due inside 10 days. Does that work on your accounting course of?”
Most purchasers will say sure. Those who push again are often those who would have been slow-paying anyway.
What about purchasers who insist on Internet 30?
Some institutional purchasers have insurance policies. That’s wonderful—however cost accordingly. In the event that they want 30-day cost phrases, your charges ought to replicate that you’re extending them credit score.
3. Be Diligent About Retainers
Retainers aren’t simply cash sitting in belief. They’re your money circulation administration device.
What most corporations do incorrect:
- Consumer pays $5,000 retainer
- You do work and draw in opposition to it
- Retainer will get right down to $1,000
- You retain working (as a result of the case is pressing)
- You retain working (you’ll invoice them later)
- You’re now doing work you haven’t been paid for but
Lockup simply elevated.
What to do as a substitute:
Set a retainer replenishment threshold and implement it religiously.
Instance coverage: “When your retainer steadiness drops under $2,000, we’ll ask you to replenish it again to $5,000 earlier than we proceed work. This ensures we are able to proceed serving you with out interruption.”
Put this in your engagement letter. Talk it clearly upfront. Then really implement it.
What this appears like in follow:
“Hello [Client], your retainer steadiness is at $1,800. Earlier than we proceed work on [next task], we’ll want you to carry the steadiness again as much as $5,000. Right here’s the bill for the replenishment. As soon as that’s processed, we’ll proceed shifting ahead.”
Most purchasers perceive this. It’s a traditional enterprise follow. Those who resist are sometimes those who will turn into cost issues later anyway.
Professional tip: Don’t wait till the retainer hits zero. In case your threshold is $2,000, ship the replenishment bill once they hit $2,500. This provides buffer time for cost processing.
4. Discuss About Cash Upfront (So Shoppers Know What They’re Signing Up For)
Most cost issues begin as a result of purchasers didn’t perceive what they have been signing up for financially.
They knew your hourly charge. However they didn’t actually know what that may imply in follow.
So when the primary invoice comes, they’re shocked. When they’re shocked, they delay cost whereas they “assessment it” or “examine with their partner” or “discuss to their accountant.”
Your lockup simply prolonged one other 30 days.
What to do as a substitute:
Have a transparent cash dialog earlier than work begins.
Not simply “our charge is $350/hour.” However:
“Primarily based on instances like yours, most purchasers can anticipate to speculate between $X and $Y over the subsequent [timeframe]. Right here’s how that sometimes breaks down…”
“We’ll invoice you [weekly/bi-weekly/monthly], and cost is due inside 10 days. Our first bill will possible be round $X for [specific work]. Does that work along with your expectations?”
“Your retainer is $5,000. When it drops under $2,000, we’ll ask you to replenish earlier than we proceed work. That sometimes occurs round [timeframe]. Is that clear?”
What this does:
- Units clear expectations (no shock payments)
- Provides purchasers time to plan financially
- Reduces cost delays attributable to confusion
- Positions you as skilled and arranged
Shoppers who can’t have this dialog upfront are sometimes those who turn into cost issues later. This dialog is each money circulation administration and shopper screening.
Widespread Lockup Errors Regulation Agency Homeowners Make
Mistake 1: “I don’t need to appear pushy about cash”
You’re not being pushy. You’re working a enterprise.
Shoppers anticipate to pay for companies. They anticipate clear communication about cost. Being upfront about cash is skilled, not pushy.
What’s really pushy? Sending imprecise invoices, ready 60 days, then calling repeatedly asking the place cost is.
Mistake 2: “My purchasers gained’t settle for tighter cost phrases”
Most purchasers will settle for no matter phrases you set—if you happen to talk them clearly from the beginning.
The purchasers who push again arduous on cheap cost phrases (cost due inside 10 days, retainer replenishment insurance policies, bi-weekly billing) are often those who would have turn into cost issues anyway.
You’re not dropping good purchasers by having clear cost insurance policies. You’re screening out drawback purchasers earlier than they price you money circulation.
Mistake 3: “I’ll repair money circulation by bringing in additional income”
Extra income doesn’t repair lockup. It typically makes it worse.
In case your lockup is 90 days and also you double your income, congratulations—you now have twice as a lot cash locked up for 90 days.
Your money circulation issues simply doubled.
Repair lockup first. Then develop income. In that order.
Mistake 4: “I don’t have time to invoice extra continuously”
You don’t have time to continually stress about money circulation both.
Bi-weekly billing takes an additional half-hour twice a month. That’s one billable hour.
If that one hour of administrative work cuts your lockup in half and eliminates money circulation nervousness, it’s one of the best hour you’ll spend all month.
Mistake 5: “I’ll take into consideration this when money circulation will get actually dangerous”
By the point money circulation will get “actually dangerous,” you’re in disaster mode. You’re scrambling to make payroll. You’re utilizing bank cards to cowl bills. You’re dropping sleep.
Repair lockup earlier than it’s worthwhile to. Not after.
What Enterprise Consultants Know About Regulation Agency Money Movement
Right here’s what surprises most agency homeowners: Money circulation administration is extra necessary than revenue margin for regulation agency survival.
I’ve seen corporations with 40% revenue margins go below as a result of they couldn’t handle money circulation. And I’ve seen corporations with 15% revenue margins thrive as a result of that they had wonderful lockup administration.
The maths is straightforward:
- Excessive revenue + poor money circulation = fixed stress and eventual disaster
- Average revenue + sturdy money circulation = stability and sustainable progress
Most regulation agency homeowners spend hours analyzing their revenue margins. They need to be spending that point analyzing their lockup.
That is precisely what we work on in Lawyerist Lab’s Money Movement Planning workshop. Not simply “construct a funds.” However the mechanics of money circulation that truly preserve corporations wholesome: lockup, working capital, money reserves, billing frequency, cost phrases, retainer administration.
Since you didn’t go to enterprise college. You went to regulation college. And no person taught you that lockup is the distinction between “worthwhile on paper” and “really capable of pay your self.”