Best Practice: Managing cash flow in a contingency fee law firm
Asked and Answered
By John W. Olmstead, MBA, Ph.D, CMC
Q. I am sole owner of a law firm in Western Kentucky. My practice consists of myself, a legal assistant, a part-time bookkeeper, and a part-time contract attorney. The practice is limited to employment law - both plaintiff and defense side. Approximately 80% of my business is contingency fee and 20% is time-billed and or retainer. While the practice has done OK over the past 15 or so years, worrying about paying bills (cash flow) is a constant source of stress for me and my family. I do no marketing - all of my business comes from lawyer referrals. Do you have any suggestions?
A. Cash flow has always been a challenge for contingency fee practices. However, times are getting harder. For personal injury plaintiff firms insurance companies are refusing to settle cases, stretching out timelines for settling cases that they do settle, paying less, and becoming even harder to deal with. Other contingency fee practices are also facing similar challenges and everyone is finding it harder to find adequate lines of credit. Many firms that were once 100% contingency fee practices are looking for ways to improve cash flow implementing different fee arrangements or by adding non-contingency fee practice areas.
I suggest that you evaluate ways that you might re-balance your case portfolio to say 60% contingency/time-bill mix. You might consider:
- Billing and collecting up front for all client costs even if the fee is contingent.
- Flat fee paid up front for a certain segment or phase of work - then contingency fees for the rest of the work.
- Actively marketing and targeting certain small business firms, establishing relationship, and seeking out defense employment work billed on a time-bill basis.
- Adding a different practice area that would not be billed on a contingency fee basis.
- Bring in a another attorney with a book of business in a complimentary non-contingency fee practice area.
Review your case pipeline report and your work habits to insure that you are putting the right effort and mix into the cases that you have so that when your time bill matters come up for billing at the end of the month - all can be billed.
John W. Olmstead, MBA, Ph.D, CMC,(www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at email@example.com.