A law firm can show a healthy profit and still be short of cash for payroll. The usual reason is timing. Work gets done in one month, billed in another and paid in a third, and the firm pays its people and its rent the whole time.
Clio's 2025 Legal Trends Report measures that gap as lockup: the work a firm has done that is either unbilled or unpaid. Across its data, the average firm has had about 93 days of work in lockup at any given time, a figure that has stayed fairly flat for two years. That's roughly a quarter's worth of fees sitting somewhere between the work and the bank.
This guide covers where cash gets stuck in a law firm, how to build a 13-week cash view that keeps client money out of it, and how to set a budget from your own billing numbers.
Why do profitable law firms run short of cash?
Fees take months to arrive. Clio splits lockup into the time before work is billed and the time between the bill and the payment. In its data, the billing half has been shrinking, so firms are getting invoices out faster. The collection half has been creeping up, because clients are taking longer to pay. A firm can fix its own billing habits and still find its cash arriving later each year.
Case costs go out long before they come back. ABA Model Rule 1.8(e)(1) lets a lawyer advance court costs and expenses of litigation, with repayment that may depend on the outcome. In a contingency practice, that means filing fees, experts and records costs leave the operating account now and come back only if and when the case resolves. A few active matters with heavy costs can tie up more cash than a month of payroll.
Contingency fees are lumpy. One settlement can fund several months, and its date is rarely in your control. A forecast that assumes the settlement lands on time is a forecast for the good case only.
Retainers aren't operating cash. Under ABA Model Rule 1.15(c), fees and expenses paid in advance go into a client trust account and come out only as fees are earned or expenses incurred. A large trust balance can make the firm feel flush when that money still belongs to clients. Your state's rule governs the details, and our IOLTA account guide covers how to keep the two accounts apart.
Some bills come once a year. Malpractice insurance, bar dues and some software renewals can be billed once a year. If the budget spreads them evenly across twelve months but the bank pays them in one, the month they hit can look like a crisis.
How do I model cash flow for my law firm?
Use a 13-week cash view: one column per week, starting from today's operating account balance, showing what comes in, what goes out and what's left. Thirteen weeks is long enough to see a slow collection month or a large case cost coming, and short enough that you can estimate each line from real invoices and bills.
Here's how the rows look for a law firm:
| Row | Where the number comes from |
|---|---|
| Opening operating cash | The operating bank balance only. Trust balances stay off this sheet. |
| Collections on invoices already sent | Your aged receivables report, spread by how fast each age bucket has paid in the past |
| Collections on work not yet billed | Unbilled time you expect to invoice, pushed out by your usual billing and payment delay |
| Earned fees moved from trust | Only fees you'll earn in that week and transfer under your state's trust rules |
| Contingency fees and recovered case costs | Only matters with a settlement agreed or expected, on the date you expect the money to clear |
| Payroll and owner pay | Payroll dates and the owner draw or salary you've set |
| Rent, software and other fixed bills | The books, on the dates each bill is actually paid |
| Case costs advanced | Costs you expect to pay out on active matters |
| Annual and quarterly bills | Insurance, dues, renewals and the money you set aside for taxes, in the week each is paid |
| Closing operating cash | Opening cash plus inflows minus outflows |
| Minimum cushion | The lowest balance you're willing to run, so a short week shows up before it happens |
Build two versions. The base version leaves out any contingency fee whose settlement isn't signed. The second adds the settlements you expect, on the dates you expect them. If the base version dips below your cushion, you have a decision to make now: chase specific invoices, delay a discretionary cost, slow owner draws or arrange a credit line before you need it.
Then roll it forward every week. Drop the week that just ended, add a new week thirteen, and replace your estimates with what actually happened. After a couple of months you'll know which lines you tend to get wrong.
For more on the forecasting method itself, including scenarios, see our general guide to cash flow forecasting.
Can AI build my law firm's cash forecast?
It can help you build the spreadsheet and spot patterns, such as which clients pay late or which matter types tie up the most case costs. Give it exported reports, not a description from memory: the aged receivables report, the list of advanced case costs by matter, and the bills and payroll from the books.
Check what it produces against the bank. An AI tool can add a trust balance to operating cash, or count an invoice twice when two exports overlap, and the sheet will look tidy either way. The test is simple: last week's closing cash in the forecast should match last week's operating bank balance.
How should a small law firm budget?
A useful law firm budget starts from capacity instead of last year's revenue. Work out what the firm can bill and collect, then plan costs against that.
For each lawyer, multiply expected billable hours by the hourly rate to get the value of the work. Multiply that by your realization rate, the share of worked time you actually bill, to get billed fees. Multiply billed fees by your collection rate, the share of billed fees clients pay, to get the cash you can expect. Our law firm KPI guide explains both rates and how to measure them.
An illustration for one lawyer, using made-up hours and rates and the averages in Clio's 2025 report of 88% realization and 93% collection:
| Step | Illustration |
|---|---|
| Billable hours for the year | 1,200 |
| Hourly rate | $300 |
| Value of work | $360,000 |
| Billed at 88% realization | $316,800 |
| Collected at 93% collection | about $294,600 |
The gap between the first and last lines is the reason a budget built from hours times rate alone runs short. Use your firm's own rates from the past twelve months once you have them.
On the cost side, list payroll, rent, software, insurance, marketing and other overhead by month, putting annual bills in the month they're paid. Add a line for case costs you expect to advance and when you expect them back. Add owner pay at a level you could hold in a slow quarter. Our guide to how much law firm owners make covers setting that number.
Each month, compare the budget with what the books show. A budget nobody compares against the books is just last January's guess.
What should I check every month?
Check the forecast against what happened, and find out why any line missed. Look at the aged receivables report for invoices drifting past 60 or 90 days, and at the total of case costs advanced but not yet recovered. Reconcile the trust account on its own schedule, separately from the operating books, so client money never ends up in a cash number by accident.
Get current books first
A cash forecast is only as good as the books under it. If the operating books run months behind, or trust transfers and case costs aren't recorded as they happen, every line in the 13-week view is a guess.
Median keeps the operating books for solo and small law firms current, with monthly reports an accountant reviews, and prepares the tax return and tax planning. Median doesn't sell CFO services, and trust work gets a separate fit review. See bookkeeping for law firms, or book a 20-minute call with Jacob to talk through your firm's cash.