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Working Capital Management: Cash is King

2 mins

Bookkeeping, Working Capital

Do you have a handle on all your cash accounts? How about every dollar that comes in or goes out? Are you earning any return on your excess cash? If these questions are important to you, you’ve come to the right place. In our last post, we provided an introduction to working capital management for the savvy and inquisitive law firm leader. This is the next in a series of posts meant to uncover the basics of working capital management for attorneys so that our readers have a better understanding of how working capital impacts their firm’s day-to-day operations and future growth potential.

Since working capital is a measure of a company’s liquidity, operational efficiency, and short-term financial health, there’s no better place to start than cash. After all, cash is king, and strong cash flow will serve as the basis for superb working capital management. A law firm’s (or any professional services firm’s) cash may consist of the following:

  • Business checking accounts (most common)
  • Business savings or money market accounts (fairly common)
  • Petty cash for small expenditures (less common)
  • Other cash equivalents (least common)

“Cash and Cash Equivalents”

So what exactly is “cash and cash equivalents”? This is an accounting term that Investopedia defines as including bank accounts and marketable securities, which are debt securities with maturities of less than 90 days… Examples of cash equivalents include commercial paper, Treasury bills, and short-term government bonds with a maturity date of three months or less. And why is this important? Because cash and cash equivalents help companies with their working capital needs since these “liquid” assets are used to pay off things like vendor bills and other short-term debt. 

Most law firms will generally have business checking accounts and potentially a savings or money market account through their bank, where they can earn a bit of interest on their idle cash. Petty cash and other cash equivalents are less common at smaller firms and may be more relevant to larger firms with more sophisticated finance departments.

Money Market Accounts

One of the challenges that leaders of professional service firms typically grapple with is what to do with their excess cash. A simple way to earn some return on your cash is to set up a money market account through a bank. This is a low-risk way to put some of your business’s cash aside and earn interest, while still ensuring that the cash is accessible if needed to pay for expenses. We recommend doing some research on the interest rates offered by different banks (you may see this referred to as the APY - annual percentage yield), as some will offer more attractive returns than others.

What should I be thinking about next?

Now that you have your cash accounts ready for business, the next step is to dig into your invoicing, accounts receivable, and collections processes. This is arguably the most important aspect of working capital management and will be the feature topic of the next post in this five-part series.  

Jonathan A. Medeiros, CPA, MBA