This one is for partners in small law firms, and for principals of other owner-run practices such as insurance brokerages, who take a regular draw from the business. I'll walk through why a draw that looks comfortable against the profit and loss can still leave the bank account under pressure, and the few numbers I look at to see whether the two are telling the same story.
A profit and loss statement tells you what the practice earned in a period. The bank balance tells you what cash it has right now. In a law firm, those two can sit a long way apart.
Fees are recorded as revenue when they're billed. The cash arrives when the client pays, which might be 30, 60 or 90 days later. Before the bill goes out at all, there's work in progress: hours already worked and paid for in wages, but not yet billed. I've written about that gap in more detail in cash flow vs profit.
Drawings come out of the bank, not out of the P&L. So the question isn't only "is the practice profitable?" It's "is the profit turning into cash fast enough to fund what partners are taking out?"
Before comparing drawings with profit, it's worth being sure what that profit figure includes. If partners do most of the fee-earning work and aren't paid a wage through the P&L, the bottom line is partly their own wage, not just a business return. I walked through that adjustment in Is your practice profitable, or just paying you?.
For drawings, the point is simple. Drawings are generally funded from that whole bottom line, the wage part and the business part together. If that combined figure is thinner than it looks, the margin for error on drawings is thinner too.
In legal practices, the measure that explains most of the difference between profit and cash is lock-up: the value of unbilled work in progress plus unpaid invoices, often expressed as days of fees.
Here's an illustrative example. A two-partner firm bills about $150,000 a month, and its lock-up has sat at around 90 days, or about $450,000 tied up in WIP and debtors. Over a busy quarter, a couple of large matters run long before they can be billed, and a corporate client starts paying slower. Lock-up drifts out to 120 days.
Fees billed haven't fallen. The P&L looks as good as ever. But an extra 30 days of fees, about $150,000 in this illustration, is now sitting in work and invoices instead of the bank. The partners' regular draw hasn't changed, so the bank balance is what absorbs the difference.
That's the pattern I see most often. Nothing is wrong with the practice's profitability. The cash is simply arriving later than the drawings are leaving.
Most partners prefer a regular monthly draw, and for good reason: their household costs are steady. Practice cash flow usually isn't.
In many law firms, the period around the December–January closedown is a good example. Courts and clients slow down, billing drops for a few weeks, and collections slow along with it. Meanwhile wages, rent and the partners' draws carry on. A draw that was easily covered from September's collections can feel very different in January.
Insurance brokerages see their own version. Commission income can bunch around renewal periods, while a principal's draw is spread evenly across the year. The P&L over twelve months may be fine. The months in between can be uneven.
Rather than a rule for how much to draw, these are the figures I look at together:
None of these sets a drawings figure on its own. Together, they show whether the current draw is coming out of earned and collected profit, or out of the cash buffer. I've covered that buffer in my post on keeping a cash buffer.
When those numbers show a gap, the conversation often isn't about drawing less over the year. It's about when the money comes out and when it comes in.
Some practices pair a smaller regular draw with periodic top-ups once a quarter's collections are in. Others put more attention on billing work in progress sooner and following up older invoices, which shortens lock-up and frees cash without touching the P&L. Which approach suits a practice depends on its matters, its clients and the partners' own circumstances.
How drawings are treated for tax, and how they relate to the practice's structure, is a separate question that I've left out here. If your practice uses a trust, my post on the proposed trust tax changes covers that ground.
Pull the last twelve months of your P&L, bank statements and lock-up figures. Put the four numbers above side by side, month by month, and look at where the draw has been funded from collections and where it has come out of the bank balance. The months where those diverge are the ones to understand before the December break.
If you'd like help reading those numbers for your own practice, I'm happy to go through them with you at Full Cycle Accounting.
This is general information only and doesn't take into account your objectives, financial situation or needs. Before acting on it, consider whether it's appropriate for you — or talk to me about your situation.
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