Norman Kenvyn on why now is the crunch time for cash flow
As if we needed further evidence that Christmas is just around the corner with festive food piling up in the supermarkets and decorations lining the streets, all the signs are there that law firms are now taking the first steps into the December slow down.
Christmas time is not necessarily a good time for the legal profession. The run up to the festivities is a crunch time for law firms, when they seek to put themselves in a position to have steady cash flow over the Christmas period. It is understandable for firms to fret about how they can improve cash flow at this quiet time for billing.
Take the case of a law firm settling litigation in late December. More likely than not, it won’t be able to secure cash until sometime into the new year. This is primarily because they won’t find a costs draftsman willing to draw up a bill of costs. In this scenario, cash flow calculations are put back by a month, and the money they desperately need to bolster their cash reserves becomes out of reach.
On top of this, January is normally the month they will pay the quarterly VAT bill, and tax bills for partners may also have to be factored in.
Whilst the December slowdown is a significant worry, cash flow can present an intractable problem for law firms at all times of the year. Indeed, recent figures from accountants Hazelwoods have revealed that the time taken for UK law firms to get paid for their work remains at over four months. Whilst this represents an improvement on the equivalent statistics from last year, it is slow progress.
In the litigation sphere these timelines become even more stretched. When a law firm’s case has been decided and the bill has been issued, negotiations kick off over legal costs, which are dictated by court process, elongating the time between billing and payment to a significant degree. Firms may even be tempted to settle for less rather than wait it out and negotiate for the right level, thereby undermining the profitability of the case.
If firms are to plan properly for business expansion and invest in new initiatives, their cash flow must be smooth and predictable. Turnover is vanity, profit is sanity and cash flow reality. Even firms that have posted huge profits in the recent past have gone under because they haven’t kept an eye on cash flow.
In contrast we have seen the more astute law firms begin to understand the financial instruments available to combat these cash flow problems. There are “cash advance” facilities that provide funds to law firms, secured against a bill of costs. As work starts to dry up at the start of the holiday season, firms might not realise they are sitting on cash waiting to be unwrapped in a bill of costs that may have been drawn up some time ago.
With a predictable cash flow, firms can better manage their needs and allow investment into new initiatives and expand their business with a clear direction in marketing and business development as their foundation. The leading firms combine this clear direction with a similarly focused approach to the minutiae of the bottom line and cash flow.
The competitive and regulatory landscape continues to evolve, and 2019 promises to be no different. Prudent financial management should be essential for firms that wish to adapt, grow and stay one step ahead of their competitors. Now is the time for firms to take stock and act and become cannier about cash flow.