Posted by Karen Edwards, head of professional development at Legal Futures Associate Institute of Legal Finance & Management
Law firms are continuing to struggle with lock-up. These were the findings of the latest Law Firm Benchmarking Report from our partnership with Crowe UK. Regional firms performed better that their City counterparts, with the average number of debtor days being 64 and the average total lock-up days 122.
With turbulent economic pressure and inflation remaining high, working capital looks to be a stress factor for law firm bank balances in the not-too-distant future.
Christmas and cash flow do not go hand-in-hand. Fewer trading days, office closures, annual leave, the season for illnesses, darker days so more lights on, etc.
The Christmas period in a law firm is a time when productivity is low, with extra pressure on staff to continue producing work (it doesn’t stop for Santa) and often becomes a compliance risk – money launderers believe that firms are vulnerable at this time of year, therefore it’s a perfect time to swoop.
All of the above results in less work being done and impacts on December billing, as well as reduced work in progress being carried over into the New Year.
Because it is the season to be jolly, a law firm will also see additional costs being incurred, such as Christmas parties, lunches, stakeholder catch-ups, bonuses, referrer gifts, etc. These costs add up and one-off expenses must be forecasted into cash flow well in advance.
So, what can law firms do now to avoid the festive bank balance blues?
The best advice I can impart would be to forecast, look at your money on account policy, drill down on your credit control, review expenditure, and have a back-up finance facility in place.
Plan ahead, communicate effectively with your legal finance teams, look at WIP, and be practical when it comes to preserving cash in the weeks leading up to Christmas.
Money on account
Do you receive money on account when your client-care letter goes out? Are you in a position to obtain funds upfront for your services? Do you raise invoices early, and more importantly, send them out promptly to ensure client account monies can be transferred quickly to your business account? Do you have easy payment access for clients, considering many of have mobile phones and use PayPal, Apple or Google Pay?
Do I pay my legal fees or buy Christmas presents? Which of these do you think your client will decide to do? Great communication with clients helps avoid delays in payments. Many of us get paid on the last day of the month or, even if we get paid just before Christmas, the cash flow is real.
What is your current policy for chasing outstanding invoices? Don’t leave it until the last minute, and possibly think of ways to help your clients if you know they are struggling, such as flexible payment terms.
The above talks about cash coming into the firm, but what about cash going out? How often do you and your finance team review expenditure? At this time of year, could you consider delaying non-essential spend until later in the New Year, for example?
We all have come across those out-of-the-blue expenses in our firms, so it’s worth planning a boost for cash flow purely for the festive period. If you have a finance facility in place, it can ease the pressures of this busy season.