Profit First Pt 6: Destroying Law Firm Debt by Fixing Your Cash Flow (Ep. 154)

Feb 17

Debt can be a significant burden for law firm owners, often leading to sleepless nights and financial anxiety. However, understanding that the root cause of debt may not just be revenue issues but cash flow management can be a game changer. On this episode of the podcast, we explore practical strategies on how to harness the Profit First Cash Flow System to not only regain control of your finances but also eliminate debt effectively.

Understanding the Debt Dilemma:

Many law firm owners find themselves in a precarious financial situation, even while bringing in substantial revenue. As Darren Wurz pointed out, it’s not uncommon for a firm to generate seven figures in revenue and still be one bad month away from bankruptcy. The primary culprit often lies in cash flow mismanagement rather than revenue generation. For instance, Wurz shares the story of a seven-figure law firm that was facing $500,000 in debt despite its impressive revenue. This scenario underscores the importance of managing cash flow effectively.

Step 1: Organize Your Cash Flow

The first step in tackling law firm debt is organizing your cash flow using the Profit First system. This method encourages business owners to allocate incoming funds into four sub-accounts: profit, tax, owner’s compensation, and operating expenses. By doing this, you create a clear structure that helps you manage your finances better. Visibility into your cash flow is crucial for making informed decisions.

Step 2: Stop Using Credit Cards

Wurz emphasizes the necessity of breaking the cycle of accumulating debt. One of the toughest yet most effective strategies is to stop using credit cards. While it may feel impossible, continuing to add to your debt while trying to pay it down is counterproductive. Consider transitioning to a cash system and only use credit for necessary expenses that you can pay off immediately.

Step 3: Set Aside Money for Profit

Setting aside even a small percentage for profit can create a significant mindset shift. Wurz advocates for allocating 1% of all incoming funds to a profit account. This practice not only reinforces the idea that your firm is profitable but also prepares you mentally for managing your finances better.

Step 4: Determine Your Spending Limits

Conducting a thorough analysis of your business expenses is essential. You need to figure out how much you can realistically spend on operating expenses after accounting for profit, taxes, and owner’s compensation. Wurz suggests working through the numbers to ensure you have a clear understanding of your budget and avoid overspending.

Step 5: Perform a Comprehensive Expense Audit

Wurz recommends a line-by-line audit of your expenses. Start by reviewing your financial statements from the previous year and categorize each expense. Ask yourself whether each cost is necessary, if it can be reduced, or if it should be eliminated entirely. This exercise can reveal significant savings opportunities.

Step 6: Negotiate with Vendors

Your negotiation skills can lead to substantial savings. Don’t hesitate to reach out to vendors and request discounts, especially if you’ve been a loyal customer for years. As Wurz shares, simply asking for a loyalty discount can result in thousands of dollars saved, which can then be redirected towards paying down debt.

Step 7: Use Your Profit to Pay Down Debt

At the end of each quarter, take 99% of the funds in your profit account and apply it to your highest-interest debt. This aggressive strategy helps reduce your overall debt burden while also rewarding yourself with the remaining 1%. Even if it's a small reward, it reinforces positive behavior.

Managing Accounts Receivable:

In addition to managing debt, law firms must also focus on accounts receivable (AR). Wurz highlights that many firms unknowingly lend money to clients by allowing them to delay payments. Implementing strict rules for AR, such as stopping work once an invoice is 14 days past due, can help improve cash flow.

Conclusion: Key Takeaways

Managing debt and cash flow in a law firm is a challenging yet achievable goal. By adopting the Profit First system, stopping credit card usage, setting aside profit, conducting expense audits, and negotiating with vendors, law firm owners can regain control of their finances. Remember, the goal is not just to manage debt but to create a sustainable financial environment where your firm can thrive. If you’re feeling overwhelmed, consider reaching out to financial experts or joining communities focused on improving legal practice management.

Resources:

Connect with Darren Wurz:

TRANSCRIPT:

Darren Wurz [00:00:00]:

What if the debt crushing your law firm isn't a revenue problem? It's a cash flow problem. You could be pulling in 7 figures and still be one bad month away from bankruptcy. Hey friend, thank you for joining me today. I want to talk with you about something that a lot of law firm owners, a lot of business owners face, and that is The D-word, debt. Welcome to part 6 of our Profit First series. You know, it's so easy as a business owner to slip into debt when you're not watching the numbers like a hawk. Or hell, sometimes you're trying to grow. You sign up for that big advertising package that's supposed to deliver tons of great leads.

Darren Wurz [00:00:49]:

You think to yourself, with just X number of new clients, This will pay for itself. And maybe it does bring in some new business. But before you know it, that revenue is gone out the door to cover new expenses and you're left holding the bag. A maxed out credit card. Sound familiar? If so, don't worry. You are in the right place. And also, don't be ashamed. It happens to many, if not most of us.

Darren Wurz [00:01:22]:

At some point in our business journey. So today's main idea is this: how to use the Profit First cash flow system to not only regain control of your chaotic cash flow, but also to tame the debt monster and squash your debt once and for all. According to the Federal Reserve, roughly 40% of small businesses are carrying over $100,000 in outstanding debt. If you're carrying business debt right now, the biggest issue isn't the debt itself. It's the cost to service that debt. What's your interest rate? Do you know how much money is walking out the door in interest? It can be devastatingly large. If you've got $100,000 in credit card debt at 29% interest, you're paying $29,000 a year just to keep your debt from growing. And that's a real cost to your business.

Darren Wurz [00:02:19]:

That's an admin salary. That's your marketing budget gone. Here's the thing. Revenue masks this problem. This is not a small law firm problem. This is not about not making money. This can happen to any size firm. You can be doing 7 or 8 figures in revenue and still drowning in debt.

Darren Wurz [00:02:44]:

Ask me how I know. I've spoken to many. In fact, I spoke to a 7-figure law firm owner just recently who was facing a seemingly insurmountable debt load. On a revenue level, crushing it. $1.5 million in revenue. And that's a huge accomplishment. An established team of lawyers and paralegals, a prestigious, well-known name in the community. All the while facing a mountain of debt, half a million dollars.

Darren Wurz [00:03:18]:

The owner was actively contemplating bankruptcy. How do we get here? How does this large of a monster grow? Little by little. The first little bit of debt seems harmless. Oh, I just need to cover payroll. I just need to pay for this ad campaign. It'll pay for itself. We've got a huge settlement coming in, etc., etc., etc. We get comfortable with a little debt and a little more and then a little more until one day we're staring at a monster.

Darren Wurz [00:03:53]:

And what's at stake here is not just the cost. It's the viability of your business. It's the welfare of your employees and clients and your own family. Are you a month away from bankruptcy? Let's fix it. So why are we talking about profit if we're talking about bankruptcy and debt? Well, as you know, Profit First, the Profit First system has you allocate all incoming money into one of four sub-accounts: profit, tax, owner's compensation, and operating expenses. If you're struggling with business debt, Profit First might be your key out of here. And here's how, here's your action plan. So first, you need to get your debt or your, you need to get your cash flow organized.

Darren Wurz [00:04:45]:

That's why Profit First, because Profit First fundamentally gives you a cash flow organizational system. And Profit First is about managing our bad behavior as business owners. It's a structural framework that reduces our cognitive bias towards bad financial decision-making. I just— that was a great definition. I just came up with that on the spot. But really, that's what it does. It helps manage our behavior. And furthermore, you can't start to manage your debt and your cash flow until you can actually really see it.

Darren Wurz [00:05:26]:

You need visibility. And so, setting up the system is the step, is the first step. That's step 1. You've got to have a structural framework for managing your cash flow. Okay. Step 2, stop using the credit cards. Hmm, at this one, you're gonna fight me. You're gonna fight me on this one.

Darren Wurz [00:05:47]:

I know it, I know it, but my points, everything goes on the credit card. As business owners, we do, we put, we put everything on the card. I know it feels impossible, but you've got to cut the line. No more adding to the monster. So, you've got to stop adding. It's going to be impossible. It is impossible to pay down debt and be adding to it at the same time. And I know, I know it's scary.

Darren Wurz [00:06:16]:

It's scary to pay cash for things. It really is. But, you know, if you really have been struggling, this is the only way. The only way to get out of the debt spiral is to start— is to move to a cash system. Now, if that's too much for you, and I get that might— that might be too much, you at least need to stop adding to the cards that you're trying to pay down. You've got to maybe have a new card that you're going to use. You're going to commit to paying off every single month. Okay, but at the same time, you need those other cards to start going down.

Darren Wurz [00:06:53]:

Okay, uh, now I caution you because you might be just setting yourself up for failure if you go and open up a whole brand new card and start using it. So be careful. But you know, it's true, you can't start decreasing the debt if you're continuing to add to it. Okay, step 3. Set aside money for profit. What? What the hell? I've got debt. I've got credit cards. What the hell? You want me to set aside money for profit? Well, hear me out.

Darren Wurz [00:07:24]:

Even if it's just 1%. This is the Profit First system. Your first account is profit. You're going to need to have— start putting 1% of everything that comes in into your profit bucket. Why? Here's why. It's going to change the way you think. And that's critical. There's a mindset shift.

Darren Wurz [00:07:44]:

There's a psychological shift that needs to happen. And by setting money aside upfront, you're going to start to shift your mindset and shift your behavior. It's why all the great financial gurus say this too. You know, if you're going to pay down your credit card debt, you've got to get your emergency fund. First. It seems counterintuitive, doesn't seem to make sense, but it is going to be the secret. You've got to tell your brain we're profitable and we can do this. And I'm going to tell you what to do with your profit in a second, so stick around.

Darren Wurz [00:08:22]:

Number 4, determine how much you can actually spend. Now, you're going to have to do some— you're going to have to do some work. I hate to break it to you. I know I know you want it to be easy, but friend, you're going to have to dig into the numbers. You're going to have to set aside a couple of hours. You're going to have to really dig in and you're going to have to figure this shit out. Okay, so get cracking because here's what you're going to have to do. Number 4, determine how much you can actually spend on OpEx.

Darren Wurz [00:08:58]:

Okay, now here's, here's a way you don't want to run Profit First. My OpEx account just goes to pay off my credit card. Hmm, okay, because that's what's going to happen. What's going to happen is you're going to start accruing more debt on that credit card. All right, so that, that's not what we want to do. That defeats the purpose. We set up profit first, and then we're just, you know, you know, using what's left over in the OpEx account to pay off the credit card. Oops, there's not enough.

Darren Wurz [00:09:23]:

And that's not how you want to do it. So you have to do some math, figure out how much you can actually spend on OpEx after paying profit, taxes, and owner's comp. So, we need to figure out what percentage is going to go in those buckets. Well, you've already got 1% going to profit. You're probably going to have somewhere around 15% going to taxes. I'm just spitballing here. Actually, we have a great article on our website about how much, you know, how to calculate your tax percentage. I'll link that in the show notes for you.

Darren Wurz [00:09:59]:

And then third, the owner's comp. So let's say you got 1% going to profit, you got 15% going to taxes. Let's say you got another 15% going to owner's comp. Should probably be more like 20, 25. Let's say 25, 25% going to owner's comp. So 25 plus 15, that's 40. You got 41% including your profit. The other 59%, that's what you can run your business on.

Darren Wurz [00:10:23]:

Now you're going to have to do some math. Take your revenue times 59%. That's your budget for everything else. If it doesn't fit in that budget, you've got a problem. Okay? If you're making $1 million a year, that means 59%, $590,000. I've got to run my business on $590,000 because the rest of it has got to go to profit, taxes, and paying me. And yes, you need to get paid. All right, number 5, here comes the fun part.

Darren Wurz [00:10:56]:

Do an expense audit, and I mean a real one, line by line. You're going to— oh, this is going to take a couple hours, so dig in. Get your credit card statements or get your accounting software, whatever's keeping track of your expenses. Start January 1st of last year, and I want you to go through every single expense. Maybe start, maybe start with last quarter. Okay, I'll make it a little bit easier for you. Start with last quarter and then you're going to go to next, go to the beginning of last year because you need to capture those one-time annual expenses. You need to capture those.

Darren Wurz [00:11:32]:

Okay, go line by line through every single expense and you're going to ask yourself, is this something I definitely need? It definitely produces profit. Okay, we can keep those. Is it something that I don't necessarily need? I could replace it with something cheaper. I could replace it with AI. I could negotiate it. Mark those. And then finally, is it something I truly don't need? Is it something I signed up for and I'm paying for and I don't need anymore? I'm not using? Is it a software subscription I forgot about? Is it a service I don't use? Ask yourself the tough questions. Do you have the premium package when the basic one will do just fine? There's, there's a lot.

Darren Wurz [00:12:19]:

I mean, as a law firm owner, I feel like you're really targeted by some of these, these vendors that charge a lot of money for their services. And it's easy. You know, you want to sign up for the bright, shiny package. I get it. But it can be very easy to spend too much. And let me tell you something, some of the best, most profitable law firms I know run with no physical office space. If you have a fancy office and you feel like you really need it, I would start there because that's a big expense. Or, you know, what's your biggest expense outside payroll? Start attacking that.

Darren Wurz [00:12:55]:

You know, don't— the little tiny things, yeah, they add up, the $15 here and $10 there, but Start with the big shit and let's get that out of the way. Okay? And if you have been working virtually and you're contemplating getting a physical office space because you feel like you need one, but you've been killing it all this time, I caution you, do you really need it? Let me tell you something. When I finally gave up my physical office and I could save that money, oh my God, that was amazing. Okay, so maybe you don't need— I had a really nice office at one point, but now I am virtual. Look at me. Okay. All right. Now, after you've done your expense audit, number 6 is you're going to negotiate.

Darren Wurz [00:13:43]:

Okay, you're going to put your lawyer hat on and you're going to negotiate with your vendors or you're going to shop for new ones. You'd be surprised just how much you can save by just asking. I was using a marketing agency once. They were great. I loved working with them. They were writing my blogs for me, doing my email campaigns. And I had been working with them for several years and the price had been the same for a long time. And I get that, that's a mistake.

Darren Wurz [00:14:11]:

Your prices need to go up with inflation, friend. They reached out and said that their prices are going to be increasing because of— they needed to, right? Well, I, you know, just by asking the question, I wrote back and I said, you know what? I've been a customer for a long, long time. And how about a— what do they call it— a loyalty discount? And they gave it to me. They were like, "Okay, well, you know, since you've been around a long time, we'll keep you at the same rate." Voilà! Look, and that's hundreds of— that was thousands of dollars back in my pocket. Okay? So, negotiate. And last but not least, here's what you're going to do with your profit account that you've been putting 1% in. You're going to use 99% of that 1% to pay down debt. So at the end of the quarter, you're going to take 99% of what's in that profit account and you're going to pay down your highest, most expensive debt.

Darren Wurz [00:15:06]:

What's going to happen with that other 1% of 1%? You're going to reward yourself. It's not going to be much. It might be $10, but you're going to give yourself a little reward because you've earned it. But the rest, attack that debt like your business depends on it because it does. Now, let's go a little bit deeper. Law firms face— some law firms, not all law firms, but many law firms face a special kind of debt that doesn't show up on your balance sheet unless you're fancy. It's your accounts receivable. Oh, that dirty word.

Darren Wurz [00:15:40]:

Are your clients paying on time? Hmm. If not, you are lending them money for free. And the law firm I spoke to that I was referencing earlier had a huge accounts receivable problem. You've got to collect on your AR. You must. You know, no other vendors allow you, your vendors don't allow you to go months without paying. Neither should your clients. So, I've got 3 rules to help you with your AR, okay? The first is the 14-day rule.

Darren Wurz [00:16:15]:

Once an invoice hits 14 days past due, stop all legal work for that client until they pay. No exceptions, period. This is not meant to be mean. This is professional. Rule number 2, the 90-day rule. Once an invoice hits 90 days, you're not gonna collect on it. Your collectability rate goes way, way, way down. Write it off.

Darren Wurz [00:16:38]:

Send reminders at 30, 45, and 60 days. After 90, it's not coming. Move on. And the third rule, the evergreen retainer rule: shift your model so that work only begins when the retainer is replenished, or bill the client monthly and keep the retainer as a reserve in case they don't pay. This keeps you from financing your client's litigation or legal needs out of your own pocket, which is essentially what you are doing. And you may want to explore the concept of flat fee billing. Hmm, worth looking at. One more thing, lockup reduction.

Darren Wurz [00:17:17]:

Some law firms are waiting to get paid and they're doing work and waiting to get paid. And if that's you, you want to map out your work-to-cash cycle and you want to get paid faster. If it takes 3 months to get paid for work done today, you're essentially carrying 90 days of internal debt. Shortening your cash cycle even by just a couple of weeks can give you a huge cash Injection. Getting paid faster or getting paid at all is the easiest win. It's the easiest way to improve your cash flow without bringing in a single new client. And if you need help collecting on outstanding invoices, I know a great service. My friend Matt runs it.

Darren Wurz [00:17:59]:

It works there. Check out Collbox at collbox.co. Shout out to you, Matt, if you're listening. They specialize in helping businesses recover unpaid invoices without damaging the client relationship. And Matt did not pay me anything to make that shout out. That's just— I know they do good work. Okay, so what can you do if you have credit card debt? Do the expense audit this week. You've got to do it.

Darren Wurz [00:18:23]:

You've got to make some time. Something needs to go. You need to cut. You don't need all those expenses. And this is so near and dear to my heart, friend, because I've been in your shoes. I've done it. I've accumulated credit card debt in my own business to fund growth, thinking that the payoff would come and everything would be fine and rosy. And don't get me wrong, sometimes leveraging financing to take advantage of growth opportunities is a great strategy, but Carrying debt without the revenue bump you need? Well, that's a path to sleepless nights and existential dread.

Darren Wurz [00:19:05]:

Don't go there. Here at The Lawyer Millionaire, we believe your law firm should be building you wealth and freedom, not stress and debt. And we can help you do just that. If you want to go deeper on this, join our community. And the Profit on Purpose book tour happening now. Our next masterclass is coming up on February 26th, and you're not going to want to miss it. I'd love to see you there. Just head over to community.lawyermillionaire.com and sign up.

Darren Wurz [00:19:38]:

It's free. And I've got one more treat for you. If you want to know exactly where your law firm stands right now and where the profit leaks are, where's the problem? I got you covered. Take my free profitability diagnostic at— we'll put the web address in the link in the show notes at our website, lawyermillionaire.com. It'll give you a clear picture of your firm's financial health in just a few minutes, 10 minutes or less. Go through that exercise and you will get your own free diagnostic that will point you to exactly where the leaks are in your business and the steps you can take to massively improve your profitability. Well, that's it today, friend. And remember, if your law firm isn't building you wealth and freedom, what the hell are you doing? Can I get an amen up in here? I'll see you next time.

Adedayo Adekunle

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