I’ve had some version of this call maybe forty times in thirty years. A managing partner calls in February, coming off the best year her firm has ever had, and she wants to talk through deferring a hire because cash is tight. She’s drawing on the line of credit to make payroll in the same quarter she closed a record year.
The first few times I took that call, I went looking for a leak. I never found one. The money was all there and all accounted for. It was sitting in her clients’ bank accounts instead of hers.
The P&L measures when work was earned. Cash arrives later. In a growing firm the gap between those two dates widens every year, because every new matter opens with labor and closes with a check months down the road. That’s why the squeeze shows up in the good years. The better the year, the more the firm has earned that it hasn’t collected.
The industry has a name for the delay: lockup, the days between doing the work and banking the money. Clio’s Legal Trends Report puts the median firm at about 93 days of it. Three months of finished work, earning nothing.
What the delay was costing her
Her firm collected $2.6M that year. Start with the daily rate.
$2,600,000 ÷ 365 = $7,123 collected per day
Her lockup ran near the median, about 95 days.
95 days × $7,123 = $676,685
That’s the balance of finished work sitting outside her bank account on any given day, all year, as a standing feature of how the firm operates.
She’d earned every dollar of the record. She’d collected about ten months of it.
I’ve worked with firms at the same collections that get the cycle down to 25 days. Bills go out on the first of the month and follow-up starts at day thirty.
25 days × $7,123 = $178,075
$676,685 − $178,075 = $498,610
Half a million dollars, and the difference between the two firms is billing habits. Clio’s quartile data says the spread is real in the wild: the best firms carry under 20 days of unbilled work while the bottom quartile carries more than 78.
Now price the gap, because her bank already had.
$498,610 × 9% = $44,875
Nine percent is a composite line-of-credit rate for the demonstration; her figures are composites drawn from engagement work and rounded. She was paying her bank roughly $45K a year to finance credit she was extending to her clients at no charge. The interest showed up on her P&L as a finance cost. Nothing on the statement connected it to the prebills sitting in partner review.
There’s a second cost underneath the interest. The loan doesn’t repay at par. Clio’s numbers again: about 14% of billable work at solo and small firms never gets invoiced, and roughly a tenth of what’s invoiced never gets paid. Old WIP is where most of that dies. The longer the work sits, the more of the principal never comes back.
Why her reports couldn’t see it
Start with the accrual layer. The P&L answers one question: did the firm earn money. It answers correctly. Nobody built a report to track how much the firm has lent out, because nobody decided to lend anything.
Which is the second layer. The delay accumulates one postponed billing run at a time. WIP waits on prebill review, and statements go out whenever someone gets to them. No target was ever set, so no report can show a miss.
The third layer is the one that matters. A firm carrying 95 days of lockup is in the lending business. Every engagement letter extends unsecured credit at 0% as a default term. No borrower was underwritten and no limit was set. A bank that ran its book this way would have regulators in the lobby. A law firm that runs its book this way has a record year and a February cash problem.
The number to pull this afternoon
Your practice management system already holds both inputs.
Lockup days = days from work performed to bill sent + days from bill sent to cash received
Loan balance = lockup days × (annual collections ÷ 365)
Annual carry = loan balance × your line-of-credit rate
Run it on your own book. Your reporting produces a profit figure every month. It has never produced this number, and this is the one that explains February.
What a priced loan looks like
There’s nothing exotic about the fix, which is the part that surprises people. The firms at 25 days aren’t running better software than the firms at 95. They wrote the loan terms down. Billing goes out on a calendar instead of a mood. A lockup target sits in the monthly partner report next to origination, so the delay finally has a number a meeting can look at. Some firms go further and price the credit directly, with deposits held against work in process, or evergreen retainers that refill as they draw down. Slow payers get shorter terms, the same way they would at any other lender.
None of that is collections pressure. The clients were always going to pay. The open question was when, and a firm that puts the answer in writing usually finds most clients had no opinion about it at all. Nobody’s client asked for 95-day terms. The firm offered them without noticing.
The partner asked me why cash was tight in a record year. The question that governs is different: what does the firm charge for the credit it extends, and on what terms. At the median firm the answer is nothing, on terms the clients set.
A firm that never set a credit policy still has one. The clients wrote it.
The client figures are composites drawn from engagement work, labeled as such. Market figures are from the Clio Legal Trends Report, paraphrased and attributed: median lockup of roughly 93 days; top-quartile firms under 20 days unbilled against bottom-quartile firms past 78; about 14% of billable work never invoiced and roughly a tenth of invoiced work unpaid.
Sources. Clio Legal Trends Report (lockup, realization, and collection benchmarks).
If the number you pulled is bigger than you thought. The Growth Intelligence Scorecard reads your firm’s revenue structure from the numbers you already carry. About four minutes, in your browser, no meeting. growthprolegal.com/scorecard