Managing Cash Flow in Your Firm

Welcome to the Effective Lawyer, a podcast for ambitious attorneys who want to improve their practice. My name is Jack Zinda and I'll be your host. Hi and welcome. I'm Kevin Tully, the CMO of Zinda Law Group, and today, we're going to flip the tables a little bit. I'm going to be interviewing Jack Zinda, our CEO and founding partner, and we're going to be talking about managing cash at a law firm. Jack, how are you today? I'm great, man. Love to be here. Thanks for taking over and hosting. Yeah. Anytime. Excited to do it. Good to know that you're still surviving despite the Cowboy's loss this year. Oh, talk about a brutal season. I would love to say that I was surprised, but unfortunately, the last two decades have been rough ever since Emmett retired, or went to the Cardinals, it's been a rough ride. Well, Jack, I don't know if I ever told you this about myself, but growing up in New England, somehow I was a Cowboy fan as a youth, probably because of their great run in the '90s. While I was home over the vacation, I actually stumbled across this photo here of myself and my grandfather, and I'm holding a Cowboy helmet. What you can't tell about it is that it's filled with cheese and you can pull chips out of the face mask in the front here. Oh, that's awesome. I need one of those. So I was thinking about you during the holidays during that tough time. That's a great photo. I got to get one of those helmets. Speaking of helmets, look at the haircut I had going on back then. That's beautiful. It looks like Toad from Mario. You got to bring it back, man. Bowl cuts are all the rage. All right. Well, let's get into it. By way of background Jack, tell me why did you decide to become a personal injury lawyer? When I was in law school, I originally wanted to be a prosecutor. I had a desire to do something with my law degree that would allow me to be in the courtroom and would feel like I was making a difference in the world. And I really had no idea what personal injury law was or how it worked or even that was really an option for myself. As my law school career progressed, and I thought a little bit more of the way I think, I realized that being a prosecutor may not be the best fit. One, if you have a lot of student debt like I did, it's tough to get by at that initial county attorney's salary. And number two, it didn't feel right the type of impact I was making, in that you might be putting away low level drug offenders and things like that. So I clerked at a firm that had a small personal injury practice and I got to work on a couple cases during the summer and I just saw the difference you could make in someone's life. It was a real David versus Goliath story. You got to be in the courtroom, you are wearing the white hat and I just fell in love with that practice area that summer. That's amazing. When did you start your own practice? This? I was at a firm from 2006 to 2008 and we initially started in Round Rock, Texas, which is a suburb of Austin about... Now they're kind of the same city almost, they're almost merged, but at the time, about 15 minutes from Austin, with my myself and one other partner and an associate. Okay. So you've been doing it for how many years now? Oh gosh. All right, so I had the firm in '08 and then 2022, so that would be 14 years. Okay. So in addition to being Cowboys fans for some period in our life, we have a similarity in that we've both started businesses. My business was a products company and in a products business, as most people know, you receive cash for goods as an exchange on the spot. Tell me how cash is different in a personal injury practice. Yeah, and that I actually is one of the areas that a lot of law firms have trouble is dealing with cash. Some of the things that make a personal injury practice, and even a law firm, different when it comes to managing cash is when you actually receive the revenue and when you can, what's called, actualize it. When you can take the cash that you receive and actually turn it into income that you can then put in your operating account. So for a personal injury practice, there's a couple components that come into play. One is you don't get paid for, typically, between six months to up to two to three years from the date that you're hired by the client. It's like a giant layaway program. The second piece is the law firm has to spend money in order to get that result in the form of payroll, staff and then you have to pay outside expenses that we front on behalf of the client, so expert witnesses, deposition costs, things like that. So there's a big cash outlay with every case that you acquire. It can be tricky because if, let's say, you've got a really great case for the firm, it's a large wrongful death case involving a trucking company, well, that case may take two years and you're going to have to spend between $100,000 and $200,000 of your own money in order to get to that result in the end. So it can create a lot of pressures on the law firm and on an attorney when they're trying to start a practice. So going back to your personal story, you're just out of law school. You have these debts, you've worked at a firm for a couple of years and then you go to start your own firm. How do you make it work from a cashflow perspective? How did you get that started, knowing that cash wasn't going to be coming in for such a long period of time? Our journey was a little different. At first, we had an hourly practice that was a good supplement, that allowed us to float some of the cases we had. The other area that we did is we got a line of credit with a bank, it was a relatively small one at the time, I think... Man, it was 2008, so the market had just crashed and lending was very, very tight. I think we went to five or six different banks and finally a local bank gave us a line of credit for, I think, $20,000, $25,000, so we're not talking about a lot of money. I also really developed some skills with Excel and QuickBooks and starting to learn what other businesses do for forecasting, but on the initial front, having an hourly practice, which was about 40% to 50% of the revenue we anticipated, allowed us to ensure that we were going to at least be able to pay the rent and pay ourselves a very modest salary. Then the line of credit was a backstop, and then the other piece was making sure that I had a good mix of cases, ones that could resolve relatively soon as we started the practice and ones that might take longer to achieve results. So if someone is starting out in their law career and they have the end goal of owning their own personal injury practice, what tips and tactics would you give that person to get started on that journey? And maybe it's starting a practice right away, or maybe it's going somewhere else for a little while and then starting a practice, but in terms of jump starting that, what do you recommend? This is going to sound really basic, but I think the first thing you've got to do is make yourself financially literate and you really can't outsource that. I don't know any successful law firm owner that is not somewhat financially literate. You don't have to be the best, but you need to understand how much in cash reserves you need to have. So what is the amount of money you need to make sure you have in the bank at all times? You need to be decent at budgeting. Now you can hire people that can backfill that, that can really be the pros. You can hire part-time bookkeepers, part-time accountants, but there's substitute for you, as the business owner, understanding that piece. One of the key things that you've got to do, as a lawyer especially, is you've got to look at running your practice like it's a case. So, and I still do this, when I look at my list of cases I work on, and now at our firm size, I'm lucky enough, I work on three cases at a time and then I help my other lawyers with about 20 other cases where I'm more of an advisor on those, but then I have cash flow as a case that I work on. It's something that I'm looking at every single month. What's the status of it? What are the things that I have to do to make sure we maintain it? So first make yourself financially literate. There is a great book. I think it's called Numbers 1.0 by Greg Crabtree potentially, but I'll get the name and put the book in the show notes, but that's a really simple book for, not just lawyers, but all business owners, that really explains how to look at the financial health of your business. So once you get yourself educated, then you have to figure out, what's my business model going to be? For personal injury lawyers, there's a couple different approaches you can take. One is you can have a steady stream of income from another revenue source, another practice area. I know a lot of successful personal injury lawyers that have a partner that does criminal law that is cash positive at all times. They also can try cases together. There's a a similar mentality of helping the underdog. I know some that have been successful, partnering up with family law attorneys. I personally think it's better to try to specialize on one practice area, so maybe you have a partner that does another one or you have an associate that can do that area, that makes it cash positive. So that's like option one is having a partner or another practice area that is cash positive. You could also try yourself to multitask and do two different practice areas. When I was an associate at the first firm I was at, I had to do that because my pay was eat what you kill, and they said, "Listen, we need you to generate revenue right away," so I did some hourly work on business and civil litigation type things. The second approach you can take is borrowing on a line of credit. So a line of credit is typically with a bank where they give you an amount of money that you can access at any time and you're supposed to pay it back on a regular basis. Our line of credit started very modestly, and then grew. In every quarter I would ask for a slight increase. That allowed me to test the waters with the bank to make sure we were still in good standing and you want to go and talk to your lender and find out, "Hey, what are the things you're looking for here?" Develop a good relationship and if you start small, over time it can build bigger and larger and larger. A tip on that front is I would go to a local community bank. The bank that we work with has been just incredible. Their name is R Bank and it's named after Nolan Ryan. A lot of people don't know this, but Nolan Ryan has probably made more money in banking than he ever did playing baseball. He started a group of banks, sold them, and now he's doing it again. It was pretty cool because we were one of their first business customers, and I got to meet him at the grand opening of the bank- That's amazing. ... which is another- Fast balls and fast cash. Exactly, exactly. My relationship with them has just been incredible and now we are a large client in a smaller bank, opposed to if I'd gone to Chase, one, I don't know if we would've had the success in getting access to cash we needed. And two, we definitely wouldn't be a big fish. I don't know how big you have to be to be a big fish at Chase, but it's probably in the billions. Right. So I would go with the local community bank, find out what they're looking for, and then really try to educate them on how good of a business person you are, and your business plan and how your business should function. The third way you can go about getting started on cash is to team up with another law firm that you could work on the cases with. They front the case expenses and then you put in the sweat equity. I've seen a lot of lawyers do that successfully and it's a win-win, because you share the fee with another firm that has the resources to put in case expenses. You're able to keep your overhead really low. Maybe you use their staff or paralegals to help with certain things. You generated the business and so it's a win for the firm you're working with and you can also learn from them as well. That's a way to keep cash flow really low in the beginning. So those are some of the tips to get the initial liquidity going and liquidity is just a big word for cash. Yeah. Great. So you educate yourself, you get that cash coming in. You mentioned the right mix of cases. Can you talk about that a little bit more and what types of cases were you looking for at that point in your career? That's a great question. So the first thing you have to figure out is on average, how long will the case that I'm working on take to fund? So some cases you know are going to take a really long time compared to others. For example, a car wreck case, the time to resolve that might be six to nine months, whereas a wrongful death case against a trucking company is probably going to be closer 18 months to two years, because you're going to have to go that much further into litigation. There's other types of cases that are in between. Now we've resolved trucking cases in nine months in the past, but you want to play on the law of averages. The other piece on the mix of it, that I'm looking at is, what is the source of recovery that we're going against the insurance company policy, and then what do I think the harms are to the client, and is it a case where the insurance company's going to feel pressure to pay up sooner rather than later? So if I have a case with say a $100,000 insurance policy, and I have a client with $50,000 in medical bills, I know the insurance company's going to want to resolve that case pretty fast, which gives us the ability to say, "Okay, this case is going to resolve more quickly than these over there." And that's where you can get into trouble if you have too many large cases and you don't have a cash plan, because you're going to have to wait two years to get paid on those. This podcast is presented by Zinda Law Group, a nationwide personal injury firm. For over 10 years, the experienced lawyers at ZLG have been partnering with outside counsel across the United States on all types of personal injury and wrongful death cases. With over 30 attorneys, Zinda Law Group has paid out millions in referral and joint venture fees since 2015. To learn more about partnering with Zinda Law group, please email us at referrals@zindalaw.com. We'll schedule a time for you to meet with Jack Zinda or one of our trial lawyers to discuss your case. I know a lot of business owners have funny or interesting stories about cashflow woes from the early days. Any stories that come to mind for you? Yeah, I remember we had a bookkeeper that'll go unnamed, and this is one of the first times I really started learning about how to manage cash on a really intimate level. At the time we had a minimum cash balance of $20,000, which is nothing. That's sad that was our minimum cash balance, but that was it. It's like, don't ever let the operating account get below $20,000. And I'd settled a case, which at the time for me was a great hit, $100,000 resolution, so, "Wow, we're going to get a $40,000 attorney fee, and it goes into our operating account." I checked the next day and our balance is below $18,000. I tell our bookkeepers like, "Hey, what happened? I'm concerned. Did you not put the fee in? Is it not run? Why is the balance so low?" He's like, "Well, I'd been saving up all the bills we had and I got behind on paying them, so this is three months worth of bills." So I immediately learned I need to be on top of the bills and I need a better bookkeeper. Those two things. So from that point forward, I checked the operating account every day and had a process where I looked at the budget, where we're at with those things. Tell me about that early financial team. Is it just a bookkeeper? Do you have a CPA? What are you doing there in terms of financial help? I think it's really important that you have a bookkeeper and I think you can get by with a part-time person and if you're pretty financially literate yourself, you could probably get by with someone that is an overseas part-time bookkeeper. If you're not financially literate, or you're weak in that area, I would definitely get someone who knows what they're doing. You could probably get by with someone at 10 hours a week initially, but you've got to have a bookkeeper. I think it's a huge mistake. Also because we deal with trust accounts, right? If you make one mistake in a trust account, that could be your law license. Right. The other thing which I think you want to do is, always maintain check signing controls, only with people you absolutely trust. I think sometimes law firms get into trouble by giving too many people check signing authority that don't have the same relationship that an attorney does to a trust or operating account, and then get sloppy with that, and it can lead to getting disbarred, losing your law license and all of those things. One of the fundamentals of managing cash for any business is knowing what your costs are. When you're taking in cases, how are you anticipating the costs that will go into those cases? So we actually have a pretty cool method that we've developed over the years, and we use a software program that we developed that helps us analyze this and predict what our cash is going to be. We call it the fee predictor. So whenever a case signs up, the attorney puts an initial value on the case. I say, "Okay, I think this case, day one, spitballing with the limited facts I know is worth, let's say, half a million dollars." That then ties into what the anticipated fee on the case is going to be, and then we know on average how long that case would take to resolve. We can see if it was, say 10 months, "Okay, that case for half a million dollars will resolve for half a million in 10 months, and that's a $200,000 fee." And we tell our lawyers to be conservative on their estimate, because we always want to overshoot our prediction. Now, obviously that changes, because you don't know that much in the beginning. Part of the attorney's case review, that they do once a month is, they update that anticipated value of the case and so it gives you a rolling average of your predicted fees. What's important to think about with that is to know it's just an average, because every case is different and you have to have enough cases for the information to really be valuable. If you only have five cases, one may take two years, one may take two months and one may take six months. Right. And I'm bad at math, because that's only three cases. Let's pretend I said there was two more. But once you get to enough cases, and right now we have 30 attorneys, and so enough attorneys have enough cases to where the law of averages comes into play and it gives us a pretty solid prediction. The other thing we do on our cases is we have a rule that we like to follow on case expenses. Every case gets allocated a certain percentage of anticipated value that can go to case expenses. Now we can break that rule if we think we need to on a certain case, but that ensures that you're not going to spend more than the case can warrant, which avoids you having a situation where the client ends up in a bad spot at the end of the case, and also puts in some guardrails for the attorneys. Because we like to give the attorneys' autonomy on how they want to spend money on their cases based on their experience level. So if an attorney knows, "I only have $50,000 to spend on this case, I need to decide what depos to take, what experts to use." In another case they may have $300,000 they can spend. Doesn't mean they just spend it for spending's sake, but maybe they could do two or three focus groups instead of one. Maybe they could hire four experts instead of two, so it gives the attorney some guardrails there. Now when we get to revenue, as it gets closer to becoming money into our account, we also do a secondary prediction. So each attorney is supposed to look six months out and predict what cases they think are going to hit and when, and then give it a percentage of likely accuracy. Okay. As it gets closer to present day, it should be more and more accurate, so for example, month one is supposed to be just cases you've resolved. So that should be about a hundred percent accurate, "I'm going to get this case as revenue in the door." Month two would be cases maybe I'm going to mediation with this month. Month three would be ones I'm anticipating getting a demand or going to mediation in month two and so on and so forth. Then we give each attorney a percentage accuracy of how they did on that, and so we can weigh against it. And if anybody wants to talk about this or would like examples of the spreadsheets we use, just reach out to me and happy to share that with the group. That's great. Is that the same process that you use to forecast cashflow? It's part of it. So when I'm looking at cashflow, what we look at is, you want to first make sure you have a budget. That's critical. If you don't have a budget, it's very difficult to do a cashflow prediction. The budget doesn't have to be extremely detailed. You just need to know, "Okay, I'm going to spend this much on payroll, on marketing," and whatever big expenses you have, like rent. Then you lay across, "Okay, here's how much revenue I anticipate getting. Here's how much expense is going to be in the following month," so that prediction we just did gives me the revenue piece. Right. Then I've got the expense piece and you don't want to forget about bonuses, if you have attorneys that earn bonuses on the cases. At our firm, that's a pretty substantial part of our expense, so you want to make sure you're calculating that into it, and then that'll give you a net income and then you want to take out taxes. I just use the same percentage across the board that's a little higher than what it would actually be. Then that gives you your net cash difference. And you want to consider are there any other cash expenditures that wouldn't be in your P &L? For example, if you're going to take money out as the business owner, that would affect cash. If you want to pay down your line of credit early, that would affect cash. And then whatever's left over, goes into your cash prediction for the following month, and then you just repeat that for each month. I think it's really helpful, especially when you're starting out, to look six months out, I look at cash and this is going to sound a little crazy. We look at a prediction weekly for the next four weeks and then monthly for the next six months, and I look at it every week. I've got a great team on the finance side and they put together a report for me and that's just part of my routine every Monday, is looking six months out on cash. Great. So cash can come from attorneys' fees, but cash can also come from other places, and you've mentioned to me, in working together, some interesting alternative revenue sources that you've seen firms use as part of their business model. Can you describe a couple of those places that are more untraditional where cash can come from? For example, referring out cases, and getting cash flow coming from referred out cases or- Oh, yeah. Yeah. That makes total sense. I was trying to think through a sec, and I was like, "Alternative sources? Are we selling drugs? What are we doing?" No. Referring out cases and joint venturing cases is one area that can generate revenue, especially for a firm that's starting out. And with the internet now, our firm for example, gets calls from all over the country in states that it wouldn't make sense for us to travel to because maybe the case isn't, got significant enough damages to where it would warrant us charging the client for travel. So we refer that to another firm. We give them some insights, tips, we give them our resources. We try to stay in contact with the client for the firm we work with, and then we get a referral fee on the case, and that can be a nice passive revenue stream that can help, buffer some of those times that you are maybe not hitting all the cases you want. If you just get in the habit of that early in your career of referring out the cases and making sure you're tracking those, it can have a big impact later on. Great. Are there any rules of thumb, any numbers that you use to measure health when it comes to cash flow? Yeah, I think that's a great question, and also want to make sure I hit how we use the line of credit because I think that can be really critical as well to new law firms, especially new plaintiffs firms. We use a number of, two times our expenses, excluding bonuses. And the reason I exclude bonus is because if we have a killer month, bonuses are going to be high but then revenue will be high as well. If we have a terrible month, bonuses will be low and revenue will be low as well, so we exclude bonuses from our needs on that. Then if we get above that number by a certain percentage, we're going to either put that into a savings account or some sort of investment account. If it goes below that number, we're going to invest back into the organization through the line of credit or through that savings or investment account, so you're always keeping it at an even keel. I mean, honestly, the one thing you cannot substitute is being able to sleep at night as a business owner. I've learned the hard way, no amount of money can make up for that, and sometimes, the larger you get, the more scary cash flow issues can be, especially if you're in a contingency fee practice. So that habit can really help being able to go to sleep at night and not have three shots of bourbon. Well, this has been great. What other advice do you have? What other points do you want to hit when it comes to managing cashflow? I would say on the case expense side, we use our line of credit in a very disciplined way. When we borrow money from the line of credit, it is for case expenses, and when we pay it back, we pay it back immediately. There's not an end of month. We do it on a case by case basis. That discipline has really ensured that we're using it for the right reasons, and we don't overextend ourself because it's very easy... Especially we're talking in 2022, cash is very easy to get access to right now and just like student debt, it's a lot easier to take it out than it is to pay it back. I'd be very disciplined about your approach to using your line of credit. The second piece is just make this part of your discipline if you truly want to have a successful practice, whether it's one attorney or 10, of something you are consistently looking at, because I see a lot of attorneys that are stressed out, that have marital problems, that their firms go under, when if they just built this as part of their discipline, they would be very successful. Or get a law partner that's really strong in this area. If you're just like, "I hate numbers, I hate financials," work with a law partner you really trust that loves it. But I don't think there's a substitute for the business owner understanding financials. I don't think you can be a business owner and not do that. That may be a sign that maybe it's not for you. Maybe you're better off working at a firm. Right. Right. Well, Jack, that was great, thank you for joining me. Anything else you want to leave the audience with before we go today? Where can they reach out to you and contact you for more information? Yeah, just email me anytime at jack@zindalaw.com. You can reach me at 512-246-2224 and I love to share information. I love to help new attorneys, experienced attorneys and I love to exchange ideas, and usually when I do that, I learn a lot in the process as well. So I just encourage anybody listen to this that wants some advice, feel free to reach out. Thanks so much, Jack. Thank you. Thanks for listening to today's episode of The Effective Lawyer. You can learn more about our team and find other episodes of our podcast at zindalaw.com. As always, we'd appreciate that you subscribe, rate and review the pod. Thanks.