Alison, the founding partner of a small law firm, called for some advice about cash flow.
She said they’ve had a bookkeeper and CPA since the beginning. Then they hired a fractional CFO because a lot of her peers recommended it for improving cash flow.
“Cash flow is still a daily battle,” she said. “And, the firm’s profit is too low.”
After all, she told me, “I need to make a profit similar to what I would make from my money if I’d invested it in financial securities.” (She is correct.)
First thing I did was praise her for her efforts so far.
Too many founders, CEOs, and partners stop with the bookkeeper. They use the CPA for tax returns. If they hire a part time CFO, they get advice and recommendations to improve what they are currently doing.
My point of view is this: cash flow is an outcome of specific choices previously made.
You have to fix those to improve cash flow.
Hourly billing is the culprit
Hourly billing causes clients to be invoiced in arrears, which means after the work is completed. Then they have 30 days to pay.
Simultaneously, all current expenditures have to be paid, including payroll, overhead, and so on.
Traditional fixes that focus on the financials, such as raising prices, cutting costs, and increasing total revenue, will not resolve cash flow problems.
Hourly billing is so flawed that it must be ditched.
Pricing is a strategic decision not an operational one
While her bookkeeper, CPA, and CFO had worked hard to improve cash flow it was time to take the two essential strategic steps that would permanently eliminate problems with cash flow.
- Pricing model. Fixed fees and IMPACT Based Pricing are tied to the life changing differences delivered and have profit built in. No profit, no offer.
- Terms and conditions. The single best way to improve cash flow is to require payment in advance, or in installments if a matter will take more than a couple of months. These are automatically charged to their credit card or bank. Anyone who refuses these terms is not a good fit client.
Fixed fees and/or IMPACT Based Pricing
Fixed fees are appropriate for several of the fairly routine kinds of work they do. We discussed how to set those fees to ensure a profit.
IMPACT Based Pricing was a new concept to Alison, and she embraced it with enthusiasm (and relief!).
We looked closely at the firm’s work for the past 6 months.
- List all matters by name.
- Describe the IMPACT they delivered to the client.
I helped her think about the outcome, which is the resolution of the matter and then to describe how that resolution changed the life of the client.
That’s the IMPACT.
Alison grew more animated as we discussed IMPACTs.
This is what she was dreaming of when she started the firm although she hadn ‘t put it in those words.
The next step is to write down the fee for that matter.
Did the fees seem proportional to the IMPACTs?
Some did but many did not.
Not just some that were low for a significant life changing difference.
Some were too high for the difference they made.
The goal is fees proportional to the IMPACT, not just higher fees across the board.
We continued analyzing IMPACTs and fees until Alison felt confident that she could start using IMPACT Based Pricing and some fixed fees going forward.
Alison recently summed up the past year this way: “We went from constant money worries that made it hard to enjoy our legal work to enjoying all our work knowing the money will be there. I used to feel uncomfortable telling people what we charged per hour. Now I’m confident they’ll understand the connection between the IMPACT we’ll deliver and the fee.”
It’s your turn!
Take the first step and schedule a Virtual Coffee with me. You’ll learn if your firm is a great fit for IMPACT Based Pricing and then you can decide the next step.
Prefer to text? Text COFFEE to 703-801-0345.