Cautionary note: this is a fictional article and similarities to any real law firms are purely coincidental. However, there may be aspects of this which you do recognise as you read through…
Be honest – you’re worried about your firm’s financial position. You are not likely to be a large firm of solicitors – although the experiences at some well-publicised large firms such as Cobbetts or Challinors mean that this is not necessarily the case. You probably provide a range of different service lines to your clients, which may well include some long-tail personal injury or similar work. You are well established in your area and considered to be solid and dependable.
Like everyone else you have struggled in the current economic climate and have had to make quite a few cost savings over the past few years. And of course you are aware of the evolving legal services environment – such as competition from big players such as Co-op Legal and Slater & Gordon, the impact of the Jackson reforms on the personal injury market, new broader-based ABS businesses and the high street presence of Quality Solicitors.
So what’s the problem?
You, or one of your partners, is quite commercially minded and understands numbers better than the rest of you. S/he keeps a handle on the figures every month or so. There is no senior financial input from within your firm so you only get details of the overall billing each month and you know that cash has been tight on occasions, but other than that…
Well, that was a couple of months ago. Things seem to be even tighter now and your senior cashier is becoming more anxious as she tries to balance payments to cash receipts. What are you doing about those unpaid bills? You know that your partners should be speaking to these clients to resolve the issues, but they are all head-down in their work at the moment, so let’s just hope they pay up soon (they won’t).
Thinking about this, you realise there are other symptoms too. It seems that for the last couple of months there have been several pinch-points for cash flow, such as VAT, payroll, PAYE and the professional indemnity insurance renewal. Perhaps it’s time to push your drawings payments back so that these other payments can go out first? They haven’t gone up for three years now and you’ve already noted that they cannot always be paid on time. You wonder what the problem is. You simply don’t have the information available to be able to work out that, for example, your business is now simply not profitable enough for you to continue drawing at the level you have been used to.
You reduced overhead and support costs in 2010 and again in 2012 but you have not seriously looked at your fee earning people yet. It seems that the ‘new normal’ fee income level simply is not as much as it was and keeping the current fee earners fed is proving increasingly difficult. You could really do with analysing the true value of everyone but it’s not easy to know where to start. And it’s probably sensible to take another look at overheads too – you have heard of several ‘buying groups’ in the legal sector which take advantage of economies of scale to offer certain services more cost effectively.
The bank has made it pretty clear that they won’t countenance any increase in your overdraft facility and at the previous renewal last winter they even mentioned the possibility of putting in place some formalised reduction in your borrowings. The next review date is now looming and to be honest you haven’t a clue what their stance might be. Ideally you would want to prepare a business summary to support your renewal submission, so you could demonstrate your plans for the business and how you would want the bank to support you. But again you are struggling to get your thoughts together coherently and you are certainly struggling to know how to model the financial implications of your plans.
It’s not all doom and gloom!
If any of this sounds a bit like you, you are not alone. Many firms of solicitors are facing similar issues and it is those who recognise these symptoms early and do something about them that will stand the best chance of turning their business around quickly and successfully. These firms will take their heads out of the sand and appraise their businesses honestly and openly. They will not be afraid to ask for help, whether this is from their existing advisors (banks, accountants) or from consultants who specialise in the issues facing today’s legal profession. For small businesses which cannot afford to employ the full range of management expertise that large entities are able to, this will be time and money well spent. So here are 10 top tips for managing your cash position:-
- Keep your bank manager informed as to how your business is doing.
- Understand how changes in the legal marketplace will affect your firm.
- Create a 12-month cash flow forecast and update it each month. If you can’t do this yourself, get someone to help you.
- Consider using one of the legal sector buying groups to enable you to reduce some of your overhead costs.
- Revisit the number of fee earners and secretaries: are they right for the current level of business?
- Ask your clients if they would like you to bill them monthly: most business clients prefer this.
- Speak to your clients before you send them a bill which is for more than they are expecting.
- Don’t take out more in drawings than the after-tax profits that are being generated.
- Think about what to do with the business when you and your partners retire.
- Never believe an accountant who says there are 10 top tips to remember.
The future is undoubtedly still bright for those businesses which recognise and address the challenges which they face. Avoid the Ostrich mentality and you remove the greatest risk – that of doing nothing.
The author of this piece, Jon Miller, is a director of Evolve Legal Business Solutions Limited, which uses its specialist knowledge of the legal sector to provide financial management solutions for law firms of all sizes. www.evolvelegal.co.uk.
Jon Miller, MD, Evolve Legal
Tel: 07766 137 759