Part 1: Managing cash for survival
Guest post from Peter Scott
It’s hard to believe the change that we have seen in the past few weeks as the full force of the COVID-19 pandemic has hit the UK with scarcely a business unaffected.
The key challenge for managing partners, after ensuring the safety and wellbeing of staff, is to ensure that their firm survives.
In the current climate, law firm priorities are no different to those of any business:
- to ensure cash flow is secure
- to stay within their credit facilities, and
- to ensure the firm can trade profitably, if not immediately, then in the near future.
Unlike other businesses, law firm leaders have the added responsibility of compliance with the SRA Code of Conduct for Firms, specifically: “2.4 You actively monitor your financial stability and business viability” and “3.6 You notify the SRA promptly of any serious financial difficulty relating to you.”
Firms should prioritise the collection and conservation of cash by:
- Reviewing every outstanding bill and assigning to an individual for collection, agreeing payment plans where necessary.
- Billing all existing WIP (fees and disbursements) as soon as practical under the firm’s terms and conditions.
- Setting bill collection and WIP targets for all practice groups and partners and monitor performance against them.
- Being flexible with new and existing clients about the pricing of new work.
- Considering reducing partners’ drawings to send a powerful and positive signal to the bank, other funders (including HMRC), partners and staff.
- Repaying any partnership capital under the maximum length of time permitted by the Partnership Agreement.
- Seeking reduced working commitments from staff and using the Coronavirus Job Retention Scheme.
- Stopping discretionary or investment expenditure, renegotiating leases and other contracts.
- Taking advantage of Government payment deferral initiatives on VAT and income tax.
- Using your cash flow modelling to assess whether you need to apply for a formal “time to pay” arrangement with HMRC.
If, after taking all these steps, your modelling shows you exceeding existing facilities over the next 12 months it is imperative to:
- Talk to your bank – they will be expecting to hear from you and will be able to offer advice about additional short-term funding, and, potentially, access to the Government’s Coronavirus Business Interruption Loan Scheme. Ensure that your recovery plan is SMART (specific, measurable, attainable, relevant and time bound) with stress tested cash flows.
- Review alternative funding arrangements: this could include more partner capital, private equity and bond issuance to high net worth investors.
- ‘Right-size’ the firm.
- Consider your regulatory obligations to the SRA and take advice.
We know how tough and lonely it is being a law firm leader at the moment. CLT’s Two-Day Law Firm Management Masterclass will provide a toolkit for managing through this crisis as well as the opportunity to share experience with others. It’s next running as a virtual classroom on 22-23 April and I encourage you to join us.
Peter Scott, Peter Scott Consulting, former managing partner of Eversheds, is currently assisting law firms with their COVID-19 challenges.