| “More businesses fail for lack of cash than for want of profit”
Everyday there is news of shut-downs, redundancies, and administrations across many industries and the legal world is not immune. According to Rupert Hawke ACMA, finance manager at leading criminal and business defence firm Cartwright King, it is inevitable that some law firms will go to the wall over the next couple of years because they can’t ride out the recession.
The laws of economics suggest recession is the way to root out the weak and allow the strong to regroup and move forward again in better economic times. In that sense it could be argued that recession is no bad thing but it is little consolation to firms facing meltdown. However, by understanding cash flow mechanics and implementing a number of simple procedures, financial pressure can be relieved.
Cash is the name of the game in the current climate. Even though a firm may be profitable, it can still go out of business by running out of cash. For example, turnover might be constant but if work-in-progress is rising at the same time then liquidity by definition is falling.
Cash levels can be adversely affected in many ways for example by a slowdown in turnover, less availability of credit and larger risk of private debtors defaulting. Cash management is therefore more important than ever.
Central to this is the optimisation of the Working Capital Cycle (WCC) which, in the case of a legal firm, is the time it takes to complete a case and be paid for the work. The longer the cycle, the less liquidity there is in the firm.
The key therefore is to reduce the cycle thereby releasing cash into the business. There are a number of things that can be done at different stages of the cycle which can make a real difference.
At the work-in-progress stage for instance fee-earners need to be encouraged to push through cases as quickly as possible, and getting fees in advance from private clients not only reduces WCC days but also reduces bad debt further down the line.
When it comes to billing, it is vital to ensure this is happening on a regular basis and is accurate.
It is also important to have a well managed credit control function that keeps on top of debtors. The older debt becomes, the more difficult it is to collect.
There needs to be an accurate cash flow forecast in place which is reviewed and adjusted on a regular basis so that cash can be managed effectively and nasty surprises are avoided.
“Brainstorming can help to uncover other ideas to improve liquidity as everyone can contribute to making a difference,” said Rupert. “Law firms are no different to any other business. Cash really is King!”
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