Trying to keep your law firm’s cash flowing smoothly isn’t the easiest task. Between billing hiccups, client demands, and the constant follow-up on payments, it’s a lot to juggle. But when you truly understand your cash flow, you can keep revenue more consistent, make billing more predictable, and bring your stress level down several notches.

In this guide, we’ll cover how to calculate cash flow, what metrics to track, and how law firm accounting software can make forecasting and reporting much less painful.

What Exactly Is Law Firm Cash Flow?

At its simplest, cash flow is the money moving in and out of your firm. Most legal pros get that, but the following layers can trip some of us up at any stage:

• Operating cash flow: The cash generated from your day-to-day legal operations

• Investing and financing cash flow: Less common for small firms but worth knowing if you’re buying new tech or repaying loans

• Statement of cash flows: A formal financial report showing exactly where your cash came from and where it went over a period of time

Understanding these elements in full gives you the visibility to plan, grow, and avoid unpleasant surprises. Some of these terms might feel like familiar jargon, but seeing how they all fit together is what turns your firm’s finances from a guessing game into a clear roadmap. Think of it as your firm’s financial GPS.

How to Calculate Cash Flow for Your Firm

Sure, you could manually add up client payments and subtract expenses, but that’s time-consuming, error-prone, and hard to scale. Most modern firms rely on accounting and practice management software to do the heavy lifting, then review the results to understand what’s happening with their cash.

Start with Automating Net Income Reports

Net income is your firm’s revenue minus expenses, and it’s the starting point for cash flow.

Instead of calculating this manually, pull it from:

• Your accounting software (via a profit and loss report)

• A synced practice management and billing system that tracks income and expenses in real time

This gives you a reliable baseline without spreadsheets or back-of-the-napkin math.

Adjust for Non-Cash Items

Not everything on a profit statement affects cash. Depreciation, amortization, and other non-cash expenses reduce profit on paper but don’t reduce the money in your bank account.

Great software automatically accounts for these items, but it’s still important to:

• Know what’s included in your reports

• Understand why profit and cash on hand don’t always match

That context helps you avoid misreading your firm’s financial health.

Factor in Working Capital Changes

Working capital changes refer to the day-to-day shifts in the money your firm has available to operate (what’s coming in, what’s going out, and what’s still tied up in limbo). Even when revenue looks strong on paper, working capital changes can heavily influence how much cash you actually have on hand. This is where many firms lose visibility.

Changes in working capital can look like:

• Invoices sent but not yet paid

• Client retainers sitting in trust

• Prepaid expenses and accrued liabilities

Tools that track billing, payments, and trust accounting in one place make it easier to connect the dots between what you’ve billed and what cash is actually available. For example, you can quickly see which invoices are still outstanding, how much retainer money is sitting in trust, and whether upcoming expenses are about to outpace incoming payments.

You get a clearer picture of questions like: Are we waiting on clients to pay? Do we have enough cash on hand to cover payroll? Is revenue tied up in uncollected invoices? That kind of visibility helps firms stay ahead of cash crunches and make smarter decisions with confidence.

📹Watch Now: Cash Flow Mastery

Key Metrics for Measuring Cash Flow

Understanding your cashflow is the first step. Having visibility into what’s influencing it (and why) is where firms gain real control. That’s where key performance indicators (KPIs) come in.  

KPIs are measurable financial signals that help you track how well your firm is performing from how quickly clients pay to how predictable your revenue really is. Tracking the right KPIs is the difference between a firm that stays in control and one that’s always playing catch-up. Here are the numbers worth your attention:

• Days Sales Outstanding (DSO): How long it takes clients to pay. A high DSO means your cash is tied up in receivables instead of working for the firm.

• Why it matters: Tracking DSO helps you spot slow-paying trends early, tighten billing cycles, and improve cash predictability without increasing rates.

• Invoice aging: Shows which invoices are overdue and where follow-up is needed before balances turn into bad habits.

• Why it matters: Aging reports tell you exactly where follow-up is needed before unpaid invoices become uncollectible, helping you prioritize outreach and protect cash flow.

• Realization rate: Compares what you bill to what you actually collect, offering a clear look at pricing, write-downs, and overall efficiency.

• Why it matters: If this number drops, your firm isn’t collecting everything it bills. Tracking it helps you spot lost revenue, adjust pricing, and turn more billed work into cash.

Reviewing these metrics regularly helps you spot issues early, tighten up billing habits, and keep cash flow steady without scrambling at the end of the month.

Tips to Improve Your Cash Flow

With better visibility into your firm liquidity, small changes start to matter more than you might expect.

Use law firm billing and accounting software to improve accuracy and forecasting
The right tools automate billing, track overdue invoices, and give you real-time visibility into your cash flow. Firms that use legal accounting and billing software benefit from faster, more accurate invoicing, instant access to cash flow reports, and clearer insight into future cash needs — making it easier to plan instead of react.

Fun fact: With only about 29% of law firms using automated billing, most firms still rely on manual processes that delay payments and cloud forecasts. That’s a lot of cash sitting in limbo — and a big opportunity for firms that automate.

Invoice promptly and consistently

Don’t let unbilled work pile up. Sending invoices on a regular schedule shortens payment cycles and improves cash predictability.

Offer payment plans
Predictable, recurring payments are often better for cash flow than waiting on large lump sums, especially for long-running matters.

Track recurring expenses closely
Knowing exactly what goes out each month makes forecasting easier and helps you spot issues before they affect liquidity.

Review operating cash flow regularly
Frequent reviews allow you to adjust staffing, marketing, or overhead early before cash flow problems escalate.

Even small tweaks dramatically improve your firm’s liquidity and help you plan for growth rather than just survival.

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Real-World Forecasting Win

Brinkley Law Firm found lost billable time hiding in plain sight, improving cash flow now and creating more reliable revenue forecasts going forward.

Read the case study →

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The Value of Cash Flow Forecasting

A forward-looking cash flow forecast isn’t just number-crunching—it’s your roadmap. With it, you can:

• Anticipate slow periods before they sneak up

• Plan major investments without breaking a sweat

• Evaluate pricing and billing strategies with confidence

• Strengthen client relationships by avoiding rushed work or missed deadlines

For all law firms, a clear statement of cash flows and routine analysis turns guesswork into strategy. Treat forecasting as an ongoing practice, not a once-a-year fire drill, and you gain clarity, control, and fewer financial surprises. Track the right KPIs, lean on technology, and calculate cash flow regularly. With detailed reports and a proactive approach to legal billing, your firm can turn financial chaos into confidence—and maybe even make month-end something to celebrate.

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