Lockup is a critical financial metric typically used among accountants. However, there has been a push to show how much it applies to law firms. Lawyers are skilled and educated professionals, but when they run their practice, they have the dual-sided challenge of running a business.

Terms such as “lockup” can be instrumental in helping you run a successful and profitable one. Lockup speaks to the time between completing a service and receiving payment for it. In simpler terms, it’s the duration when the revenue is produced, then billed and finally collected. Law firms should understand these terms because it will assist them in maintaining a positive cash flow. We wanted to publish a blog that examines what lockup is, what its components are, and the various strategies you can use to optimize your financial position. Questions about your lockup stats? Contact your CPN Legal team to learn more.

Lockup and Its Components

Lockup is a broader term encompassing two main elements: unbilled revenue (realization lockup) and uncollected revenue (collection lockup). When you look at each one, you have a better view of your firm’s financial health. Realization lockup is the money you have earned by providing legal services to your clients, but you haven’t billed them yet. Conversely, collection refers to the billed revenue yet to be collected (as mentioned in the opening section). The sum of these two components is total lockup. Your total lockup indicates what your cash flow is and how efficiently you are receiving it. You can also calculate lockup in terms of says with the following formulas:

  • Realization Lockup = (Unbilled Revenue / Collections from Previous Fiscal Year) * 365
  • Collection Lockup = (Uncollected Revenue / Collections from Previous Fiscal Year) * 365
  • Total Lockup = Realization Lockup + Collection Lockup

How does this translate into becoming beneficial for you? When you can understand and monitor these indicators, you can identify which areas need improvement. Consequently, you can implement strategies to speed up your billing and collection processes. If you can accomplish that, then you can increase your cash flow.

The Danger of Lockup & How to Reduce It

Extended lockup periods harm your financial stability. There’s an old saying in business about how powerful cash is. This is another way of saying that companies (or law firms) must be able to access the money they have earned. Otherwise, you may be forced to deal with cash shortages. When an excessive amount of money is tied into lockup, it becomes even more challenging to cover operational costs such as salaries, rent, and utilities. In the worst-case scenario, it could push a law firm toward bankruptcy. Therefore, law firms must manage and reduce lockup durations.

Reduce lockup by issuing bills promptly, establishing efficient accounts receivable management, and leveraging software programs for tracking purposes. Implementing legal billing software, such as Clio, can streamline the invoicing process, enabling law firms to generate and send bills quickly. Additionally, online payment options can expedite the collection process, reducing the collection lockup duration.

By adopting these strategies, law firms not only increase their cash flow but also create a financial buffer to weather unexpected challenges. The less money you have in lockup ensures long-term sustainability and growth.

Call to Action!

So, you agree that lockup is important and realize that you likely have cash locked up at your firm? Here’s what to do. And if you need help, CPN has an entire team dedicated to invoicing for our clients. We can help! Reach out to Nicole at nicolet@cpn-legal.com to learn more.

  • Invoice Regularly: We think twice a month is best practice. You’d rather a client get an invoice when they are happy and remember the great work you just did for them, not a month later.
  • Replenish Trust Accounts: We believe strongly in evergreen retainers, and know how to police them to make sure they stay topped off.
  • Collect Credit Cards: Store credit cards on file in Clio Payments or LawPay, and write in your agreement that you will charge the card if an invoice goes past due. Custom fields are a great way to keep this policy organized. Ask us how!
  • Old A/R: Be realistic about older A/R, and write off anything you think is not going to be collected. Start the new year off fresh!

CPN Legal

At CPN Legal, we are well-versed in legal accounting software like Clio and QuickBooks, positioning us as a reliable ally for small and solo law firms navigating the complexities of trust accounting and cash management. Whether experiencing a growth phase or facing financial challenges, we help you optimize your financial operations and enhance your cash flow. Contact us today, and let’s work together to fortify your law firm’s financial foundation.