Your Q1 numbers are in. Fees are up on last year, the new senior associate is settling in, and the matter list has never been longer. Then you open the bank account, and it is thinner than it was in July.
This one is for owners of growing service practices: legal firms first, and also specialist rooms and claims-based firms. You'll come away knowing why growth soaks up cash before it returns any, how to put a rough number on it, and what to check before the next hire or the next big client. This isn't about chasing slow payers. It's about the cash that growth locks up before anyone has been sent a bill.
In a legal practice, every new matter starts as time on a timesheet. The work is done, the wages that paid for it have already left the account, and nothing has been invoiced yet. That's work in progress, or WIP. When the bill finally goes out, the money sits in debtors until the client pays. Add the two together and you have lock-up: the number of days between doing the work and having the cash.
Here's an illustrative example. A firm on 90 days of lock-up is always carrying about three months of fees that it has earned but not yet collected. On $4M of annual fees that comes to roughly $985,000, which is about $11,000 of fees a day multiplied by 90 days.
None of that is a problem while the firm stays the same size. Last quarter's fees arrive to pay for this quarter's wages, and the cycle balances. Growth is where it stops balancing.
When fees grow, lock-up grows with them, even if your billing and collections don't slip at all. That's the part that catches owners out.
Keep the same illustrative firm on 90 days and grow it 25%, from $4M to $5M. Lock-up rises from about $985,000 to about $1.23M. That extra $245,000 or so has to come from somewhere, and it comes out of the bank account or the overdraft before the higher fees show up as cash.
A rough rule of thumb follows from this. At 90 days of lock-up, every extra $100,000 of annual fees ties up about $25,000 of cash ($100,000 × 90 ÷ 365). At 120 days, it's closer to $33,000. The longer your lock-up, the more cash each dollar of growth needs.
The P&L won't show you any of this. Profit can be up and cash can be down in the same quarter, and both numbers are correct.
Hiring is where this bites hardest in a legal practice, because salary goes out from the first fortnight while fees arrive months later.
Take an illustrative senior associate on a fully loaded cost of about $220,000 a year, which is roughly $18,000 a month once super and on-costs are in. Say they ramp up to billing about $40,000 a month by the end of their third month. At 90 days of lock-up, very little of that billing turns into cash during the first quarter.
So across the first three months the firm might pay out around $55,000 in employment costs and collect only a small share of what the new lawyer has billed. By the time cash starts arriving, their WIP and debtors have grown to something close to a full quarter of their monthly billing. That balance stays tied up for as long as they're with you.
None of that makes the hire wrong. Often it's exactly the right move. It does mean the hire needs funding for a quarter or more, not just a place in the budget.
The pattern isn't unique to law. Medical specialist rooms often wait on third-party payers, such as health funds, workers compensation schemes or other claim processes, while practitioner and staff wages go out every week or fortnight. Adding a new specialist or a new session day adds costs straight away and adds cash some weeks later.
Claims-based practices can carry it to an extreme. When fees depend on a matter or claim resolving, WIP can build for many months before anything can be billed. Each new matter taken on is a small loan from the practice to its own future. That can be a sound business model, but only if someone has sized the loan.
The industries differ and the time lags differ. The question is the same: how many days does it take your practice to turn work into cash, and what happens to that gap when you grow?
You don't need a complex model to see this coming. Three numbers, updated each quarter, will get you most of the way:
Here's how that could play out for an illustrative legal practice planning two senior hires. The three numbers show that the growth would tie up about $300,000 over the year, which is more than the firm's buffer. The owners don't need to cancel the hires. They might stagger them by a quarter, set partner drawings to match, and talk to their bank about working-capital support three months before it's needed rather than three weeks after.
With your Q1 numbers in, work out your current lock-up in days. Then list what the next twelve months of growth looks like, including hires, new matters and new sessions, and turn it into the cash it will tie up. If that number is larger than your buffer, it's much better to find out now, while your options are still calm ones: timing hires, timing drawings, adjusting how often you bill, or arranging funding ahead of time.
If you'd like help putting a real number on what your practice's growth will ask of the bank account, I'm glad to work through it with you. Start with a short conversation 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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