Cash reigns supreme
In the May 12th edition of WSJ, Money & Investing Section, the headline says it all: "Cash Flow Reigns Once Again." The article suggests that investment decisions are now being made based on the cash flow of the company whose stock will be purchased.
What a novel concept! In the posting of another blogger, the suggestion was made that only accrual accounting tells an accurate picture of a law firm’s financial position. Yet, one can find many businesses that have good accrual financial statements but fail because they lack cash flow to sustain their business. The reverse is true. Businesses can show losses in the accrual system but have great cash flow — they collect their sales and receivables very quickly — and survive for quite a long time.
Possibly the first national law firm grew to its prominent position many years ago because of the almost fanatical focus on collecting accounts receivable. Their realization rate was very high. It is essential for lawyers today to focus on this metric to be successful.
Profits are essential, but cash is and has always been the key ingredientt for successful businesses and law practices. It is still true today … and, as the article suggests, cash reserves will enable the business to continue even through a down economy.Tags: Cash Flow - Finances, Management