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These are your financial priorities for 2021
Rosy Rourke, legal sector director at Armstrong Watson LLP, outlines the major financial priorities for smaller law firms in 2021.
There is no doubt that 2020 was a tough year for everyone, and 2021 has not necessarily started as many of us would have wished it to. Despite this, it is important to start the new year in a positive frame of mind, focusing on the management of your firm. Setting your financial priorities is one good way to achieve this. Here are our views on what your financial focus for 2021 should include.
Cash flow management
Cash flow will have been a major concern for law firms of all sizes during 2020. Although many may have weathered the coronavirus (COVID-19) storm well, that has been with the assistance of cash deferrals, Coronavirus Business Interruption Loans (CBILs) and Bounce Back Loans (BBLs) and furlough. Cash flow uncertainty is likely to continue into 2021 as the pandemic continue to impact our lives and financial support mechanisms are withdrawn. Cash flow issues can impact smaller firms in particular, as they do not necessarily have the breadth of resource to call upon.
We have always recommended that every firm, no matter its size, should prepare a cash flow forecast for a minimum of 12 months ahead, based on income forecasts, to assess if and when any serious cash flow problems are likely to occur.
In times of greater uncertainty, it is imperative to continually assess the financial stability of your firm on a shorter timescale, and the use of a 13-week rolling forecast in addition to the longer forecast becomes a vital management tool. You should use the forecast to assess what payments can / should be made, as well as identifying timing of funding being received.
Used correctly, this could be one of the most important management tools that you will have – it can help you to manage your fee-earners remotely; with team leaders asking each fee-earner on a weekly basis for the work they are doing, when it will be done by and what cash will be received and when. This information can then be inputted into the 13-week cash flow template and, notably, once fee-earners have put their names to an expected cash receipt, they are then more likely to do the things that are needed to generate that cash commitment.
The traditional funding options of law firms are of course still available – overdrafts, bank loans, specialist legal sector funders, but there is now the addition of both CBILs and BBLs.
BBLs in particular are a useful option for smaller law firms, as there are no fees or interest for the first 12 months, and an interest rate of 2.5% after that. The application closing date is now 31 March 2021, and if you haven’t already taken a BBL out, it is something you should consider, perhaps in place of more expensive funding options, such as PII financing or usual loan rates. Given there is no initial cost, the BBL may also provide a useful emergency fund.
If you do take out borrowing for future uncertainty without needing it right now, it is best to hide it away, so it is still there for the future rainy day.
Other options to consider for specific liabilities are time to pay arrangements with HM Revenue & Customs (HMRC) for your deferred VAT liabilities, or your tax liabilities due in January 2021. Although all options should be considered, if additional funding is required or taken out, the cash flow forecasts mentioned earlier become even more critical to ensure that liabilities can be paid as they fall due, particularly as there is likely to be an ongoing impact on the economy, with harder financial times to come.
As business advisers, we would always recommend billing on at least a monthly basis – and event billing on a weekly basis, where possible. Ideally, bills should be raised before the end of the month to ensure receipt by clients before month end – this way, for business clients in particular, the likelihood of being paid in an earlier payment run is increased, aiding cash flow.
WIP should be reviewed on a monthly basis and irrecoverable WIP regularly written off – this should not be a once-a-year exercise.
Similarly, lock-up management in terms of debtors will be more critical than ever. Consideration should be given to asking for payments on accounts from clients in advance of commencing work, which will lower the risk of non-payment to you. You will also need to monitor your debtors very carefully to ensure clients are keeping to your payment terms, particularly as the government support during the pandemic will inevitably wind down in the future.
Review of overheads
You should be reviewing overheads regularly in any case, but the start of a new year is as good a time as any to take another look at them. Are you paying for technical subscriptions you rarely use? Are there duplications within what you are paying for (e.g. paper copies and online versions)? Ask your people what resources they use, and how often. Are you incurring costs unnecessarily?
Consider your staff’s continuing competence requirements. Is there a policy for approving training expenditure? Consider more cost-effective options, such as in-house training tailored to your firm’s requirements, or webinars rather than costly external courses.
Other costs to review may include mobile phone contracts, energy suppliers, and even bank interest rates and charges.
You should consider some of the positive impacts of the pandemic on your expenditure – reduction in travel costs, marketing and advertising costs of cancelled face-to-face events and training activities, and potentially-saved costs via the implementation of systems and processes through necessity which have increased efficiencies.
One significant fixed cost for many law firms has always been office space. Although with smaller firms, office space is quite often owned by or connected with the partners, firms should be considering what their future requirements for an office are – how many people are there in your business, and could costs be saved through reduced office space due to remote working?
It is important that the positives that there have been are not lost – consider each piece of expenditure on its own merits and what it adds to your business, rather than returning to old ways through an obsession with “returning to normal”, something which in reality may never happen.
For many small, traditional high street law firms, the competition was changing in any case. The new alternative business structures introduced some years ago have not yet necessarily had the impact that was expected, but remote and online legal services have dented target markets, as clients seek legal assistance from non-lawyer professionals and legal self-help websites, at reduced fee levels. The opportunity for clients to seek out these alternative advisers will only have grown during the pandemic.
However, there is an opportunity here for smaller firms. They tend to struggle to compete on price with bulk providers, meaning that the personal service offered to clients must differentiate from cheaper and more easily accessible options. This is a particularly important aspect to capitalise on right now, as there is a feeling of goodwill towards and a wish to use local suppliers of goods and services, as lockdown and restricted movement have forced many to appreciate what is easily accessible in their community.
Firms may also want to consider their strategy around people and staffing. Throughout 2020, it is likely that there have been fewer people due to furlough etc within law firms, meaning that the work has been done by people at differing levels. In some firms, this has led to increased profitability, so firms should consider their staffing structures and what that looks like in the future.
Impact of recession
There is no doubt the UK economy will struggle in the months and ahead, and jobs will be lost in the UK legal sector.
Each solicitor, and firm, needs to consider if they want to continue to trade through the recession period. Now more than ever, it is vital that firms have a plan for their future and eventual succession, whether that is through merger or acquisition, internal succession, or even closure, and the financial cost that comes with that.
Armstrong Watson LLP is the preferred provider of accountancy services for Law Society members.