Want to know why so many law practices are financially unstable and struggle?
Hint: It has nothing to do with finances.
But first, let’s make a few things crystal clear:
- Financial stability is the foundation any business is built on.
- Just because we’re in the regulated monopoly of law - or that every other law practice is terribly managed - doesn’t make us exempt from becoming financially sound.
- If you want to make practicing law a real business, you must learn how to maintain financial stability.
The reason lawyers have problems managing financials has nothing to do with financial management. It has everything to do with their business model.
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When I first started my practice, I came up with all kinds of “creative” (read: stupid) payment structures to get clients in the door. At one time, I offered no retainer, a discounted fee, and no payments for 60 days.
Another time, I offered a 10% discount for simply signing up for a retainer. My goal was to get clients and clients is what I got. In other words, the cockamamie schemes worked. Unfortunately for my young lawyer self, they were nightmares.
I got stuck with plenty of work from cheapskates that never paid. Overly demanding clients who believed that, because I was offering “creative financing” that I was desperate (which I was), and that gave them license to abuse my time.
Yes, these creative payment structures got me work. But they also got me all the wrong clients and therefore, a financial instability problem. Poor collections, bad clients who didn’t respect my expertise, and didn’t refer much.
Financial instability is a customer acquisition issue, not an accounting one.
So why do so many law practices struggle with financial instability?
They don’t refuse the wrong clients and attract the right ones.
Flash forward several years, and I’ve got completely solid cash flow, profitable every single month. I’m turning down more clients than I’m accepting, because I know they’re not the right fit. If someone didn’t like my fees, or how I charged, it was fine – they weren’t the right fit for the firm. Coincidence? Absolutely not. Causality.
If you’ve got cash flow issues, no amount of creative discounting or billing is going to solve it. The thing that will is picking better clients.
It all starts with how you think about your practice, and your clients. More to come…