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John Clarke, head of sales at Wesleyan Bank, outlines four financial priorities you should pursue in 2021.
Whether you're resolving to maintain a stricter financial focus this year, or seeking new opportunities to maximise your revenue, the pressures of the pandemic are forcing law firms to examine their cash flow like never before.
It’s impossible to plan with any conviction unless you know your firm’s current and future financial picture.
With cash flow being the heartbeat of any business, you need to have up-to-date financial forecasts outlining future projected income for the next three, six and 12 months.
Some key questions to consider include:
These answers will provide an indication to potential cash flow generation, projected profitability and shape your firm’s vision and resilience.
Businesses which used cloud-based technologies early in 2020 ensured their staff could work remotely from anywhere during the first coronavirus (COVID-19) lockdown.
The experience has meant that there is an increasing recognition that digitalisation must become an integral part of the legal sector, otherwise law firms run potential operating risks.
A 2019 report by legal practice management software developers Clio suggested that the average lawyer only spent two-and-a-half hours on billable work each day, significantly restricting a firm’s revenue possibilities and ability to reduce long lockup cycles.
Consider how modern technologies can be used to boost productivity, improve client services and ultimately drive revenues.
Create a digital roadmap to determine:
Advances in technologies, such as document and case management, time and expense recording, and artificial intelligence, mean that evolving innovations are no longer the preserve of larger law firms with significant IT budgets.
Flexible asset finance solutions from specialist finance providers allow firms to invest and spread the cost of software and hardware, along with associated implementation, maintenance and support costs typically over a period of one to five years.
It may also be possible to take advantage of the Annual Investment Allowance (AIA), which has been temporarily extended by the government once more from £200,000 to £1 million until 1 January 2022 to help stimulate investment.
The AIA allows the cost of certain assets to be offset against profits in the year of purchase, rather than having to spread capital expenditure over several years.
The Law Society’s Financial Benchmarking Survey 2020 suggests that firms are forecasting a 10 to 20% drop in revenue for the 2020/21 financial year.
Given this bleak outlook, firms should be looking at how they can maximise existing and new opportunities in a competitive and volatile marketplace.
With the current stamp duty holiday deadline set to run until 31 March 2021, many law firms with conveyancing departments can expect growth opportunities in the first quarter and could adjust their pricing structures accordingly to meet the peak in demand.
Other areas sadly seeing an increase in activity include family law due to the pandemic causing spikes in break-ups and divorce, and significant increases in private client work around wills, power of attorney, trusts and tax planning.
Employment lawyers may also see a surge in enquiries from employers and employees after the government’s Job Retention Scheme closes on 30 April 2021.
Make sure your firm is equipped to allocate sufficient staff resources so you can serve these needs and ensure that chargeable, full invoices are issued in advance with payment received before commencing any work.
Cash into the firm should always be a fundamental focus.
In the current climate, a greater emphasis should therefore be placed on identifying clients that may struggle to pay their legal fees due to financial difficulties. As such, law firms may want to review their process in handling these cases and be clear as to when and how payments are due to prevent the client running into difficulties.
Help is also at hand. The deadline for government stimulus packages bounce back (BBLS) and coronavirus business interruption loans (CBILS), have been extended until 31 March 2021.
Law firms can also choose to defer tax and VAT payments until January 2022 and March 2022 respectively.
However, choosing to delay could have serious financial implications in the future. Many self-employed legal professionals may have to pay more in tax than they have actually earned in the past year because the payment on account system is based on the previous year's earnings.
Alternative finance providers offer unsecured loan facilities which allow you to spread the cost of tax liabilities in a flexible way, over a term of six or 12 months (for self-assessment tax).
Some are also currently offering an optional deferred repayment for the first month, further easing the burden on your finances.
Specialist lenders can also provide commercial funding solutions to enable businesses to spread the cost of their VAT bills over a three-to-12 month period and retain greater control over their finances.
Managing cash flow at a law firm is never a simple task. By following the above recommendations, law firms will be better placed to navigate the unpredictability of 2021 and beyond on a sounder financial footing.
Views expressed in our blogs are those of the authors and do not necessarily reflect those of the Law Society. Wesleyan Bank is a strategic partner of the Law Society.
For more information and to set up an appointment to speak to a Wesleyan adviser, visit our Wesleyan partner page.
Our pastoral care helpline for solicitors and their staff experiencing personal, financial, professional, or employment difficulties is open 9am to 5pm, Monday to Friday on 020 7320 5795.
Our Practice Advice Service offers free and confidential support and advice on legal practice and procedure. The Practice Advice Service is open 9am to 5pm, Monday to Friday on 020 7320 5675.