Last month, the SRA published a study of 76 firms that had suffered financial difficulty. It found that in nearly 40% of cases, the firms’ situation was caused by poor financial and business management. Often this is because senior managers lack a true understanding of the firm’s financial position. For example, a firm with substantial borrowing and outstanding debt, could make a profit, but still be in financial dire straits.
In response to the study, Redbrick Solutions [1] Managing Director, Martin MacDuff is urging managers and senior partners to critically analyse whether they are managing the firm’s finances correctly. According to Mr MacDuff, there are four financial risks commonly faced by firms
- Bad debt management
- Bad credit management
- Bad cash flow management
- Senior partners who lack financial awareness
Bad Debt Management
Ensuring that clients pay on time is the life blood of any firm.
To avoid bad debt, you should request an upfront deposit from your client. Starting work without a deposit can result in large outstanding debts which, if replicated across the firm, can directly affect cash flow and the ability to pay creditors.
Failing to bill for WIP on time, and not keeping clients informed about the total amount owed are hidden risks. Traditionally, firms provide clients with a quote for the work to be undertaken and only invoice at the end of the matter, a more sensible approach could be to invoice monthly.
Redbrick Business Intelligence has various tools to manage WIP. It provides an interim ‘Billing Statement’ giving the client a breakdown of current WIP and it has the functionality to automatically generate invoices on a monthly basis for selected departments or even per matter.
In addition, several comprehensive reports on WIP and outstanding debts are available to partners. These can be run automatically and then emailed to partners at regular intervals, making it easier for management to monitor and control WIP and debts.
Bad Credit Management
Not keeping an accurate record of creditors is an easy mistake to make.
If expenses are only recorded when a creditor is paid, the firm will have a false impression of cash flow. The bank balance may appear healthy, but if there is no record of the extent of credit owed, there could be a month end rush to find enough funds to pay for general overheads and the biggest expense – salaries. Firms can be left with a choice, pay creditors on time or pay their staff.
This scenario can be avoided. If creditor invoices are recorded when they are initially raised, firms will have an accurate reflection of their cash flow. They can then manage credit better and avoid the potential risk of dipping into the Client Account.
Redbrick Business Intelligence includes an easy to use ‘Purchase Ledger’ and several comprehensive reports to accurately depict the firm’s outstanding creditor position.
Bad Cash Flow Management:
Correcting the management of debtors and creditors will improve the firm’s cash flow.
In addition, firms should set up individual ‘cost centres’ for each department. This will allow management to understand the profitability of each area of the business and will greatly improve the allocation of resources.
Redbrick Business Intelligence includes the necessary tools to create individual cost centres. Senior partners can then review financial performance by cost centre and make informed decisions about which departments to invest in and grow. Ultimately this will increase the firm’s profitability and cash flow.
Financial Awareness
The survival of any business requires its partners to have a firm grip on the management of their finances.
This can only be achieved if the right data is available, and presented in a way that is clear and concise. Redbrick Business Intelligence has around 125 standard reports, covering all of the financial data that should be scrutinised when making informed business decisions.
Redbrick Business Intelligence has been designed to provide key staff with the tools and knowledge to help manage these financial risk factors. But at Redbrick Solutions, we do more than just supply our software. We will spend time with partners to understand any knowledge gaps. We will demonstrate the best reports to use and explain how to read them, so that partners fully understand what the figures are telling them. Furthermore, we will assist firms to set up and implement best practice across all departments, ensuring unified processes. We do not simply install our product and walk away. We are proud of the ongoing relationship we have with our clients, many of whom take advantage of our complimentary monthly financial reviews.
Do you really understand your firm’s financial position? Can you say with confidence which area of your business is the most profitable? Do you know how much work in progress is yet to be billed? If ‘no’ is the answer to any of these questions, it may be time to find out how Redbrick Business Intelligence could improve your financial awareness, please visit www.redbricksolutions.co.uk [2] or call 0845 166 2629.