Building Your Law Firm's Cash Reserve: How Much Is Enough and Where to Keep It

The financial cushion that separates thriving firms from struggling ones

Every law firm owner knows the anxiety of watching their operating account balance fluctuate. A big settlement comes in and suddenly you feel flush. Then payroll hits, rent is due, and you're back to wondering if there's enough to cover next month.

This rollercoaster isn't inevitable. It's a symptom of operating without adequate cash reserves.

At Accounting Girl, we talk constantly about cash flow management and financial metrics. But reserves are the foundation that makes everything else work. Without a cushion, you're one slow month away from crisis—no matter how good your billing practices are.

Why Law Firms Need Larger Reserves Than Typical Businesses

The standard small business advice is to maintain three to six months of operating expenses in reserve. For law firms, we typically recommend the higher end of that range—and sometimes more.

Here's why legal practices face unique cash flow vulnerabilities.

Your trust account can't be touched. Unlike other businesses that can tap various accounts in an emergency, the funds in your IOLTA are untouchable. That money belongs to clients until it’s been earned, period. Your operating reserve is genuinely all you have.

Filing fees and client costs often have to be paid before you get paid by the client - these costs are often overlooked when factoring overhead, but they can quickly drain your operating account or run up the credit card bill if not properly managed. 

Collections are inherently unpredictable. Even with excellent billing practices, legal work doesn't generate predictable revenue like a subscription business. Cases settle unexpectedly. Clients delay payment. Retainers run out faster than anticipated.

Your expenses are largely fixed. Rent, salaries, malpractice insurance, bar dues, software subscriptions—these costs hit whether you had a good month or a bad one. Unlike a retail business that can reduce inventory orders during slow periods, most of your overhead is locked in.

Contingency practices face extreme variability. If any portion of your revenue comes from contingency fees, you already know that income arrives in lumps rather than streams. A case you expected to settle this quarter might drag into next year.

Calculating Your Target Reserve

The right reserve amount depends on your specific firm, but here's a framework to start.

First, identify your fixed monthly expenses. Include rent or mortgage, payroll and payroll taxes, benefits, malpractice insurance, software and technology, bar dues and licensing, and any debt service. Don't include variable costs that scale with revenue—focus on what you'd owe even if you billed nothing.

Second, multiply by your target months. For most firms, we recommend four to six months of fixed expenses. If your practice has significant contingency work, high client concentration (a few clients represent most of your revenue), or seasonal patterns, lean toward six months or more.

Third, adjust for your risk tolerance. Some attorneys sleep fine with three months in reserve. Others need six months to feel secure. There's no universally correct answer—but there is a minimum below which you're operating dangerously.

A solo practitioner with $15,000 in monthly fixed expenses should target $60,000 to $90,000 in reserves. A small firm with $50,000 in monthly overhead should aim for $200,000 to $300,000.

Those numbers might feel daunting. That's okay. The goal isn't to build reserves overnight—it's to build them deliberately.

The Psychology of "Idle" Cash

Here's the conversation we have regularly with law firm owners: "I have money sitting in savings earning almost nothing. Shouldn't I invest it? Pay down debt? Put it to work?"

The resistance to maintaining reserves is understandable. Attorneys are trained to be productive. Idle cash feels wasteful.

But reserves aren't idle. They're working by providing security, flexibility, and peace of mind.

Security means you can cover payroll during a slow month without panic. Flexibility means you can say yes to a complex case that requires upfront investment. Peace of mind means you can focus on practicing law instead of constantly monitoring your bank balance.

Think of reserves as insurance you're paying yourself. The "return" isn't interest—it's the avoided cost of emergency borrowing, the retained client relationships you'd lose if you had to chase every invoice aggressively, and the better decisions you make when you're not operating from scarcity.

Building Reserves Gradually

If you're starting from zero, the path to six months of reserves can feel impossible. But you don't need to get there immediately.

Start with a target percentage. Commit to moving a fixed percentage of every collection into your reserve account before paying anything else. Even five percent adds up over time.

Treat reserves like a bill. Schedule an automatic transfer on the first of every month. When reserves become non-negotiable—like rent or payroll—they actually get funded.

Use windfalls strategically. When a larger-than-expected settlement arrives or you have an unusually strong month, resist the temptation to distribute everything. Allocate a portion to accelerate your reserve building.

Track progress visibly. Knowing you're at 2.3 months of reserves and targeting four months is more motivating than vaguely "trying to save more." Your financial reporting should include reserve status.

Where to Keep Your Reserves

Reserves need to be liquid and accessible—but not so accessible that they disappear into daily operations.

A separate savings account at your primary bank works for most firms. It's accessible within a day if needed, earns modest interest, and stays out of your operating account where it might get spent accidentally.

Money market accounts offer slightly higher yields while maintaining liquidity. For reserves above $250,000, consider spreading across multiple institutions to stay within FDIC insurance limits.

Short-term treasury bills or CDs can work for the portion of reserves you're confident you won't need for 90 days or more. But don't sacrifice accessibility for yield—the whole point of reserves is having them available when you need them.

Two critical rules: reserves should be in a completely separate account from your operating funds, and other than when you’re funding the account or in dire need, you should pretend it doesn’t exist. If it's in the same account, it will get spent.

Warning Signs You're Dipping Too Often

Reserves exist for genuine emergencies—not for smoothing out every fluctuation in cash flow. If you're regularly drawing from reserves, something is wrong with your underlying financial model.

• Watch for these patterns:Dipping into reserves more than twice a year suggests your regular cash flow isn't covering operations. 

• Never fully replenishing after a withdrawal means you're slowly depleting your cushion.

• Using reserves for predictable expenses like rent payments indicates a budgeting problem, not a reserve problem.

If you see these patterns, the answer isn't larger reserves—it's fixing the cash flow issues that make you dependent on reserves for normal operations.

Reserves Enable Opportunity

We've focused on reserves as protection against downside risk. But they also enable upside opportunity.

With adequate reserves, you can take on a complex case that requires months of work before payment. You can hire that promising associate before you have enough work to keep them fully busy. You can invest in technology or marketing that won't pay off immediately. You can negotiate from strength with clients instead of accepting bad terms because you need the cash.

Firms operating without reserves are in constant survival mode. They can't think strategically because they're too busy managing this month's cash crisis.

Sustainable growth requires the financial foundation to weather slow periods and invest in the future.

Reserves are that foundation.

Building reserves isn't glamorous. It doesn't generate the excitement of a big case win or a new client signing. But it's the quiet infrastructure that makes everything else possible.

At Accounting Girl, we help law firms build the financial systems that support long-term stability—including the discipline and tracking to build and maintain appropriate reserves. If your firm is tired of the cash flow rollercoaster, let's talk about building a more stable financial foundation.