Lockup in law firms (cash flow): Understanding and Improving Your Firm’s Financial Health
‘Lockup is the time between doing the work and actually getting paid for it.’ That sentence tells the story. Lockup in law firms (cash flow) drives day-to-day survival. When lockup grows, your cash sits tied up. Because it delays receipts, it creates payroll risks. However, the issue is fixable with clearer policies. As a result, firms that act regain control quickly.
Lockup combines accounts receivable and work in progress. Practically, you calculate it as AR plus WIP divided by average daily revenue. Because of this, firms with the same revenue can have very different cash flow. For example, bi-weekly billing reduces lockup, while monthly billing often lengthens it.
Too often, cash flow problems stem from lockup issues. For instance, long payment terms and unclear engagement letters delay receipts. Moreover, large unpaid WIP can hide underbilling. Therefore you may not have a revenue problem. Instead, you have a lockup problem.
This article gives practical steps to improve lockup and free cash. You will learn billing cadence changes, retainer replenishment tactics, and stronger payment terms. Also, you will see how to track average daily revenue and measure progress. Finally, we outline simple policy changes that generate predictable cash.
If you want guided help, consider our Cash Flow Planning workshop at Lawyerist Lab. It walks firms through diagnostics and fixes. Because fixing lockup fixes cash flow, the workshop focuses on measurable changes. Begin here to turn trapped revenue into working capital.
What Lockup Means and How to Calculate It
Lockup in law firms (cash flow) measures the time between doing the work and getting paid. Because this metric combines billed and unbilled work, it shows how long revenue sits trapped. Therefore firms use it to diagnose cash flow stress. The formula is simple and actionable.
Formula
Lockup = (Accounts Receivable + Work in Progress) ÷ Average Daily Revenue
Key components
- Accounts receivable (AR): Billed amounts that clients owe but have not paid yet. AR includes invoices sent and aging balances. Because AR reflects collection speed, it directly lengthens lockup when slow.
- Work in progress (WIP): Earned but unbilled work. WIP appears when teams complete work but delay invoicing. As a result, high WIP hides revenue and extends the time to cash.
- Average daily revenue: Annual revenue divided by 365. This converts yearly income into a daily flow. Therefore average daily revenue normalizes AR and WIP into days of revenue.
Step‑by‑step example
- Given AR = $45,000 and WIP = $30,000
- Annual revenue = $500,000
- Average daily revenue = 500,000 ÷ 365 ≈ 1,369.86, rounded to 1,370
- Lockup = (45,000 + 30,000) ÷ 1,370 ≈ 54.75 days
In other words, this firm experiences about 55 days of lockup. That means it takes roughly 55 days from performing work to receiving cash.
Interpreting lockup ranges for small law firms
- Under 30 days: Excellent. Firms have predictable cash and low payroll risk. They can invest or pay vendors promptly.
- 30 to 60 days: Average. Firms operate normally but may face occasional cash pressure. However they can smooth this with short‑term planning.
- 60 to 90 days: Strained. Cash flow becomes tight and payroll or vendor payments can feel risky. Therefore firms should act to lower lockup.
- Over 90 days: Problematic. Firms face serious liquidity risk and may need financing. As a result, profitability and growth suffer.
Why lockup matters and what affects it
- Billing cadence affects lockup directly. For example monthly billing often produces 60+ day lockup. By contrast weekly or bi‑weekly billing reduces lockup and improves cash flow.
- Payment terms and retainer policies matter too. For instance payment due upon receipt or short payment windows speed collections. Retainer replenishment keeps cash available for work in progress.
For practical guidance and case studies, see Lawyerist’s overview on lockup: Lawyerist’s overview on lockup and broader receivables strategies in practice: Forbes’ broader receivables strategies.
Use this formula monthly to track progress. Also pair it with clear engagement terms and faster billing to turn trapped revenue into working capital.
Strategies to Improve Lockup in Law Firms (Cash Flow)
Improving lockup requires both policy changes and operational fixes. Below are practical techniques that firms can implement quickly. Each change reduces days of lockup. As a result, cash becomes available for payroll and growth.
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Change billing cadence to weekly or bi‑weekly
- Move from monthly billing to bi‑weekly or weekly invoicing. Because you bill more often, invoices arrive sooner. Therefore clients pay sooner and lockup drops. Weekly billing often cuts lockup by weeks. Bi‑weekly billing is an easier transition for some firms.
- Operational tip: automate invoice generation with your practice management software. As a result you reduce administrative delays and missed invoices.
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Set payment terms that favor cash flow
- Use payment due upon receipt or within 10 days. These terms shorten collection windows. However, avoid defaulting to Net 30 if you cannot afford the delay.
- Offer incentives for early payment, such as a small discount. Alternatively use automated payment links and card processing to reduce friction.
- For more on receivables and client expectations, see this practical overview: Forbes Overview.
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Implement retainer replenishment policies
- Require clients to replenish retainers when balances fall below a threshold. For example, replenish when retainer drops below 2,000 and top up to 5,000. This approach keeps cash on hand and funds immediate work.
- Use clear rules in engagement letters to avoid disputes. As a result you reduce collection arguments and payment delays.
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Have an upfront money conversation and clear engagement letters
- Discuss fees, billing cadence, and payment expectations during intake. Because clarity reduces surprises, clients comply more often.
- Put payment terms, late fees, and retainer rules in the engagement letter. This creates legal cover and sets expectations up front.
- For a deeper primer on lockup and engagement practices, see Lawyerist’s guide: Lawyerist Guide.
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Capture time and WIP promptly
- Require same‑day or next‑day time entry. Delay in timekeeping creates WIP and underbilling.
- Run weekly WIP reports and invoice work completed older than a set window, such as seven days.
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Use automation and payment technology
- Send automated reminders and enable online payments. These tools speed collections and reduce friction.
- Integrate billing with accounting so AR aging stays current. Therefore you avoid surprises and can escalate collection action fast.
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Monitor lockup and set targets
- Calculate lockup monthly using the formula Lockup = (AR + WIP) ÷ Average Daily Revenue. Track trends and assign ownership.
- Set achievable targets, for example reducing lockup by 10 days in 90 days. Then measure and iterate.
Quick wins to test this month
- Change one practice to bi‑weekly billing for a pilot group.
- Require retainer replenishment for new matters.
- Finally implement payment upon receipt terms where possible.
These strategies lower lockup and strengthen cash flow. As a result, firms reduce cash anxiety, meet payroll, and free capital for growth. For guided, hands‑on help, consider a structured Cash Flow Planning workshop to diagnose and implement these tactics.
How Billing Frequency Affects Lockup and Cash Flow
Choosing a billing cadence changes your accounts receivable dynamics and work in progress. Therefore selecting the right frequency gives predictable cash flow and reduces lockup.
| Billing Frequency | Typical Lockup Days | Cash Flow Benefits | Likelihood of Reducing Lockup Strain | Quick Implementation Tip |
|---|---|---|---|---|
| Weekly | 15 to 35 days | Fastest conversion of WIP to cash; steady receipts reduce payroll risk and improve working capital | High | Automate invoices; start with a pilot group |
| Bi-weekly | 25 to 45 days | Frequent billing smooths cash flow while balancing admin workload | High to Medium | Move monthly clients to bi-weekly for new matters |
| Monthly | 60 to 90+ days | Lowest administrative load but often increases AR and WIP | Low | Use only with strict payment terms and rapid invoicing |
Practical notes and impact estimates
- Weekly billing often lowers lockup by two to four weeks. As a result firms free cash quickly. Also staff get steady predictable receipts.
- Bi-weekly billing commonly cuts lockup by one to three weeks. Therefore it is a practical compromise for many firms.
- Monthly billing typically produces 60 plus days of lockup. Consequently it increases cash flow anxiety.
Additional considerations
- Pair faster billing with payment due upon receipt or short payment windows. Doing so multiplies the impact on cash flow.
- Use automated payment links, retainer replenishment, and clear engagement letters to reduce disputes. These steps shorten AR aging and free trapped capital.
Test one change this quarter. Then measure lockup using Lockup = (AR + WIP) ÷ Average Daily Revenue.
CONCLUSION
Managing lockup in law firms is essential to stable cash flow and long term health. Fix lockup, and you fix cash flow. When AR and WIP stop piling up, firms can pay staff, invest, and scale. Therefore the steps in this article are not optional. They are practical, measurable levers.
Start with simple changes and measure results. For example move billing to weekly or bi-weekly. Also set payment due upon receipt or short windows. In addition, implement retainer replenishment rules and clear engagement letters. As a result, you reduce accounts receivable aging and shrink WIP.
These tactics lower liquidity risk and reduce cash flow anxiety. For instance, firms with under 30 days lockup gain flexibility. Conversely, firms over 90 days face real danger. Therefore, act early and set specific lockup targets each month.
Case Quota helps small and mid-sized law firms apply high level strategies. They adapt practices that Big Law uses for predictability and scale. Moreover, Case Quota focuses on measurable changes like billing cadence, AR management, and retainer policy. As a result, many firms regain working capital and win market share.
Visit Case Quota for hands-on help and a clear action plan. Learn how to calculate lockup and implement fixes that produce real cash. Go to Case Quota to explore services, resources, and contact options. Start today to free trapped revenue and build a stronger firm.
Frequently Asked Questions (FAQs)
What is lockup and why does it matter for my firm?
Lockup in law firms (cash flow) is the time between doing the work and getting paid. It combines accounts receivable and work in progress. Because revenue sits unpaid, firms face payroll and vendor risk. Therefore tracking lockup gives a clear view of liquidity. In short, fix lockup and you fix cash flow.
How do I calculate lockup for my firm?
Use this formula Lockup = (Accounts Receivable + Work in Progress) ÷ Average Daily Revenue. Average daily revenue equals annual revenue divided by 365. For example AR 45,000 and WIP 30,000 with 500,000 annual revenue equals about 1,370 average daily revenue. Thus lockup equals (45,000 + 30,000) ÷ 1,370, which is roughly 55 days.
Which billing cadence reduces lockup most effectively?
Weekly billing reduces lockup the fastest, because invoices hit clients sooner. Bi weekly also helps and balances admin work. Monthly billing usually lengthens lockup and increases AR. In addition automating invoice delivery and reminders multiplies the benefit. Start with a pilot group to test client acceptance.
What retainer and payment term policies work best?
Use payment due upon receipt or short windows like ten days, because they shorten collection time. Avoid relying on Net 30 when cash is tight. Require retainer replenishment when balances fall below a threshold, for example replenish under 2,000 up to 5,000. Also include these rules in engagement letters to reduce disputes.
What are practical first steps to lower lockup now?
Calculate lockup monthly and set a target to reduce days. Next, pilot bi weekly billing and require prompt time entry. Use online payments, automated reminders, and clear money conversations during intake. Finally assign ownership for AR and WIP reports. If you need hands on help, engage a consultant who focuses on law firm cash flow and operations.