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Preparing for an Economic Downturn Part 2: Protecting Cash Flow and Client Base

by Erik Mazzone |

If you missed Part 1 of this series, you can read it here.

I grew up with my German grandma living with my family. She was like a third parent to my brother and me. She wasn’t an educated person; her formal schooling ended in 8th grade and she immigrated to the US in the early 1920’s after she turned 18. She was smart and wise and had lived through the best and worst the 20th century had to offer.

She wasn’t a talker (German, go figure) and when she did talk, she was given to using only a few words at a time. But they often cut to the heart of the matter of whatever we were discussing. One of her favorite idioms was to “know which side your bread gets buttered”. I remember it well because the first time I ever heard that was from her. It reflected the kind of simple pragmatism that she deeply believed in and that carried her and so many others through the Great Depression.

That simple pragmatism is the subject of the second part of this series on preparing your law firm for an economic downturn. Knowing which side your bread gets buttered on, or to put it in law firm speak, protecting your cash flow and your client base.

It’s easy to get lost in the haze of overly busy days and get stuck running from emergency to emergency, causing you to lose sight of the big picture. In these harried days - all too common for anyone running a small law firm with too much to do and not enough help to do it - you need to make the time to remember and focus on which clients and referral sources produce the bulk of your cash flow.

Protecting cash flow as we head into the next several months is job one for preparing your firm for a downturn. The extent to which you can maintain the cash flow into your business will largely determine how you are able to weather the challenges and seize the opportunities ahead.

The first step is to remember (or learn, if you never knew) where most of your revenues come from.

For some firms, the answer will be simple and readily at top of mind. In these firms, a handful of big clients and referral sources provide the lion’s share of revenue (not to mention support for the Pareto Principle.) If your firm doesn’t fit this mold or if you have been too deep in the weeds of getting the work done to accurately answer assess the source of most of your revenues, don’t worry. This is a perfect opportunity to do some digging through your billing and financial data and learn some more about key aspects of your business.

If your firm doesn’t have a handful of big clients responsible for most of the revenue, the chances are good that it does have a handful of referral sources who send you much of your work or other marketing channels which generate your business. Whatever the specifics of your firm, take the time to figure out the clients, referral sources and marketing channels that are producing most of your cash flow. We’re not talking about the attorneys and staff who most are most productive at handling the work; that will be the subject of an article coming soon in this series. For now, the focus is just on in-flows.

If we do find ourselves in a downturn, the odds are good that you will have to make some prioritizing decisions about where to put your firm’s finite resources like marketing spend and your own business development time. Once you have identified the key sources of your cash flow, start preparing now for the winter ahead. Check in with clients, schedule lunch with referral sources, review marketing plans and spend to make sure you are getting the maximum bang for your buck in the event you have to trim costs.

The work you do on this today will pay dividends in the months ahead. Or as my grandma might have said, it will keep your bread getting buttered.

As always, if you’d like to schedule a consult with me to talk through this stuff, the consults (3 per year) are free for Lawyers Mutual insureds. You can schedule one that works for you on this page that automatically connects to my calendar. 

Links to other articles in this series: Part 1: Introduction

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