As we look to welcome in a new year, the UK economy waits with anticipation over the prospect of an effective COVID-19 vaccination and the delivery of a BREXIT deal that will support UK businesses.
The challenge for many law firms, beyond the concerns over future fee income levels, will be the reality of increased costs caused by the ending of the furlough scheme, the start of CBILS loan repayments and the settlement of any deferred tax/VAT. Adding to this, the increases to Professional Indemnity Insurance (PII) premiums leads all firms to consider how best to recoup cash and build sustainable financial reserves.
Lexcel encourages law firms to adopts strict controls (Lexcel 2.2 ) which should help to maintain a watchful eye on business finances, and the SRA has also mandated that firms must be able evidence their approach to financial stability (SRA Code of Conduct for Firms 2.4).
“The mind is everything. What you think you become.” – Buddha
SRA recently published their Risk Outlook 2020/2021 which offers further insight on several future developments and it is clear that firms must proceed with renewed energy in order to encourage an effective flow of cash within the business.
In the spirit of Christmas, these ‘three wise kings of finance’ may not offer gold, frankincense or myrrh but they will provide an immediate positive result for your firm heading into 2021.
1. Review client money interest rates
The threat of negative interest rates has been widely discussed over the last couple of months and the big 4 high street banks offer a historic low rate of 0.01% on client monies. Do not despair – it is still perfectly possible to achieve higher rates on ‘top slice’ client monies. You just need to know where to look. That is an extra £4,900 per £1m deposited.
2. Complete financial benchmarking
The Law Management Section offers an opportunity for firms to benchmark their financial performance. Participants receive a bespoke report which they can use to effect positive change in the approach to cash management. For example: A £5m turnover practice that can reduce lockup (Debtors and WIP) by 10 days can expect to reduce their cashflow by £136k. This reduces the reliance on an overdraft and provides headroom for future periods of cash shortages. This practice should be an essential annual event for Lexcel firms and offer a great exercise for the COFA to really understand the financial position of the firm.
3. Remove billing/cash collection from fee earners
Many firms now realise that allowing fee earners to earn fees whilst the finance team owns billing/cash collection, creates a perfect balance. Evidence is of course anecdotal and success levels will vary amongst firms, but it is encouraging to learn that firms who have made this step report a positive impact on cashflow and more importantly, the positive development of their teams understanding of the importance of effective cash control.
There are many ways to improve the financial performance of a legal practice, and what is important is to first have a clear understanding of your firm’s cultural approach to financial management. Only then can an improvement plan be mapped out.
The Financial Stability Scorecard is a free resource available to firms associated with the ILFM. The scorecard takes less than 5 minutes to complete and does not require any financial information. With 100% of respondents confirming the scorecard helps to evidence their approach to financial management, you can be sure this resource offers added value.
Paul McCluskey is Managing Director of Gemstone Legal which helps law firms to maximise income whilst reducing risk. Former UK Head of Professional Practices at Bank of Scotland and Lloyds Bank, Paul has worked with law firms of various sizes and complexity across the UK and Northern Ireland. Having seen banks shift away legal sector specialism, Paul set up Gemstone Legal to offer firms a trusted, independent approach to finance and risk management. Paul is a Lexcel assessor and speaks and writes regularly on financial factors impacting the UK legal sector.