Top tips for firms to preserve your cashflow

Simon McCrum
Simon McCrumMcCrum Consulting
Andrew AllenPKF Francis Clark

Firms are already seeing that maintaining their cash flow has become vital but challenging. Clients are also likely to be struggling with cash flow and this may lead to them not settling outstanding legal fees.

These are the top tips for preserving your cashflow:

1. Identify your firm’s entitlement for the government’s COVID-19 support for businesses measures

Use the Law Society’s tool to determine your firm’s eligibility for the government’s:

  • Coronavirus Business Interruption Loan Scheme
  • Coronavirus Job Retention Scheme
  • deferring VAT
  • statutory sick pay relief packages
  • small business grant funding
  • HMRC’s Time to Pay Scheme

2. Take steps to manage the repayment of larger cash outgoings such as VAT, PAYE and corporation tax

The government has announced that it will defer VAT payments for all businesses for three months from 20 March until 30 June 2020. No application is needed.

Businesses will not need to make a VAT payment during this period. Taxpayers will be given until 31 March 2021 to pay any accumulated liabilities.

For those who are unable to pay their tax liabilities due to coronavirus, HM Revenue and Customs (HMRC) will discuss your specific circumstances to explore:

  • agreeing an instalment arrangement
  • suspending debt collection proceedings
  • cancelling penalties and interest where you have administrative difficulties contacting or paying HMRC immediately

It may be possible to set up a Time to Pay Arrangement (TTP) with HMRC for payments including VAT, PAYE and corporation tax which can alleviate short term cash flow pressures for firms.

A Time to Pay Arrangement with HMRC is a debt repayment plan for your outstanding taxes.

Companies that have defaulted on their payments to settle their corporation tax, VAT and/or PAYE can ask HMRC for extra time to pay.

This may not be applicable for all and when considering this option, firms should consider:

  • arrangements may only be for one month’s payment, not for future monthly payments, otherwise the arrangement has to be cancelled
  • you may not be able to enter an arrangement if there are already amounts outstanding
  • HMRC will need to know that the law firm has been impacted by coronavirus and that it will have difficulties paying PAYE and VAT – this will avoid late payment penalties

Find contact details for HMRC

You may have some of these payments set up automatically from your bank (such as for PAYE and VAT payments).

Consider whether these payment arrangements should be cancelled whilst you consider your options. This may also apply to payments to general suppliers of the firm which you may want to control or authorise more closely over coming months.

3. Review your accounting provisions to potentially accelerate tax relief on future costs

In an effort to reduce reported profits in the 2019/20 financial year and reduce tax payments, firms may benefit from looking closely at accounting standards and the ability to make provisions for future costs in the 2019/20 financial year in order to get tax relief a year earlier (and reduce tax payments).

Firms may wish to consider whether a change to their financial year end could be appropriate in order to speed up when they will experience reduced payments due to declining profits.

For example, firms with a 30 April financial year-end may benefit in cash flow terms from earlier reductions to their income tax payments if they change their year-end to 31 March.

4. Review and manage other larger payments such as rent and expenses

Early review of the following large payments may help firms in their effort to safeguard cash levels over the coming months:

  • Rent: It may be possible to ask your landlord for an extension of time for payment of the rent and/or service charge or for a reduction in either or both of these. You should also consider avoiding any prepayments and consider renegotiating any rentals paid quarterly in advance so that they are paid monthly in arrears instead. This needs to be done carefully so there is no breach of the lease
  • Spread large expenses like insurance: Explore expenses that can be spread over a longer period (such as insurance) monthly rather than annually in advance
  • Negotiate with key suppliers: For key suppliers, consider whether it’s important to continue with prompt payment or whether settlement times could increase, or even potentially maintained, in return for a discount
  • Review your payment schedules: Review direct debits and automated payments and consider whether the basis needs to change – once the cash is gone, it’s gone; it may be better to have a requirement internally for specific authorisation for more payments than is currently the case

5. Undertake financial forecasting to ensure you have accurate information for future decisions

Financial forecasting, particularly cash flow forecasting, is crucial so firms can understand their future cash flow at this time with some degree of reliability.

Firms should have undertaken this process so they can quickly adapt to changing positions in their business to aid the other decisions you may need to make around large payments in the coming months.

We would recommend preparing a detailed monthly cash flow for the next 12 months along with actions to stress test any assumptions that are being used in preparing the forecast.

Indeed, prepare a number reflecting different out-turns and durations around the current lockdown.

6. Managing clients as part of cash flow planning

In many firms, we are expecting to see lower activity and productivity or, in some cases, activity in firms will be directed at areas that are not likely to be cash-generative in the short term.

Where client activity is continuing, there are steps that you can take to support your firm.

  • Offer discounts for up-front or prompt payment: Firms may want to consider offering discounts to clients for either upfront or prompt payment in an effort to bring in cash and to ensure fee earners are working on matters that can bring in cash at the earliest point
  • Review and manage client credit limits: There is a balance to be struck here in professional firms who often have long-term relationships with their clients. However, being more stringent about setting and applying credit limits to clients at this point will be an important consideration for firms. Credit limits should include work in progress and disbursements as well as outstanding fees (i.e. total lockup). Firms will have to consider setting and enforcing better control systems for clients over the coming months
  • Consider higher levels of payment for new matter starts: Clients who start new matters at this time are doing so with a genuine need for support and legal advice. Whilst having due regard for longer-term business relationships with clients, you may want to consider asking for considerably higher levels of payments on account from clients to ensure the cash is available to transfer from client to office account when the work is completed
  • Consider what clients you are taking on at this time: Especially at times like this, firms should consider being selective about which clients they take on and be willing to have precise conversations about what can be delivered and at what cost (and not just easy engagement discussions). Where possible be strong on your price, define what the price covers and what it doesn’t cover, and make it clear that clients have to pay on time
  • Check your lawyer vs files ratio: Some law firms may find the challenge that they have too many cases and clients rather than too few. Check how many files your lawyers simply can’t get around to working on and question whether your firm needs more lawyers rather than more files
  • Review work in progress reports: Use ‘aged’ work in progress reports to consider what work your lawyers have done for a client in the past and whether you may be able to bill for this work now

7. VAT on bad debts

Firms may find some cash flow savings by reviewing bad debts (both fee and disbursements) and considering whether any VAT can be reclaimed.

VAT on bad debts can be reclaimed once the debt is over six months old (from the date the payment was due) and is less than four years and six months old.

In order to reclaim, you must have paid the VAT over to HMRC and written off the debt in your accounts.

8. Protecting client cash

Firms should be increasingly alert during this time to the enhanced risk of cybercrime.

Fraudsters thrive on disrupted environments and working conditions which is exactly the situation most law firms find themselves in at this time.

Firms should in particular consider whether their client money control systems need to be modified and strengthened to deal with new working conditions where most – if not all – employees, partners and finance team members are working remotely and geographically separated.

9. Share your insight

The Law Society is making representations to the Treasury, the Department for Business, Enterprise and Industrial Strategy, the Ministry of Justice and others to ensure financial viability of firms is at the top of the government agenda.

Share your insight and examples by emailing coronavirus@lawsociety.org.uk, which will help us illustrate our asks to government with examples when speaking to ministers and officials.

Find out more about our business continuity toolkit