Money makes the world go round

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29 September 2014

Wallis: banks don’t like bad news to be hidden from them

Posted by Nigel Wallis, partner at Legal Futures Associate O’Connors

“When I was young, I thought that money was the most important thing in life. Now that I’m old, I know it is.” Oscar Wilde

Three cheers! The recession is over, we still live in a United Kingdom, property lawyers are buying Aston Martins again (in London anyway) and the stock market continues its Houdini high-wire act.

So why are so many law firm managing partners still feeling a bit glum?

The plain fact is, running a business is tough and running one that sells promises of salvation ‘at a price’ in today’s free-download world is tougher still. Every client win is an achievement and every approaching month-end leaves managing partners feeling like anxious parents on a football touchline.

Having financial stakeholders willing to back judgment calls is essential in helping managing partners stay focused on the firm’s day-to-day trading and strategic planning. Stakeholder relationships like this are built on trust – dare we say mutual trust?

So how is a bank’s trust established and maintained by a law firm?

We asked a number of experienced bank managers specialising in the legal sector to share with us the common features of law firms who fulfil their ‘if only they were all like this’ test.

Based on this admittedly anecdotal research, here are our top five tips on how to build a banking relationship that works:

TIP ONE – Secure funding lines well before you need the money, even if this means paying a fee for a facility you never ultimately need. Most banking relationships break down because a customer flips when their bank is unable to bail them out of a crisis.

TIP TWO – Structure borrowing so that it works for your bank as well as for you. Ideally, term loans are for longer-term investments such as asset purchases, and overdrafts are for shorter-term management of fluctuating working capital.

Banks have different benchmarking and key ratios for different types of lending, so you are more likely to get a positive borrowing decision if you have worked with your bank to structure your request in a way that suits both you and your bank.

TIP THREE – Have a business plan. It doesn’t have to be written down. Take time to explain it clearly to your bank and listen carefully to any feedback. Bank managers tend to work even harder to support firms when they have been allowed to share in the firm’s vision.

TIP FOUR – Send a full set of management accounts and budget variance analysis with a simple 10-line progress report to your bank manager every month, without exception. If performance is adrift, explain what steps are being taken to address matters.

This has been described as the single most valuable communication to build trust and manage expectations. Banks don’t like bad news but they like it even less when it’s been hidden from them for months.

TIP FIVE – Don’t draw against unearned profits using the bank’s cash. This may sound over-simplistic but it is the biggest factor in every law firm partnership or LLP failure and the thing most likely to damage a bank’s trust.

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I visit a lot of different businesses in the course of my job – both law firms and other types of organisations. This gives me a unique opportunity to compare how the legal sector is shaping up against the commercial world in how they welcome visitors to their business, and it’s fair to say that those that go the extra mile certainly stand out.

October 21st, 2016