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Article | Risk Management Matters – Legal PI

Adjusting your financial strategy to the new world

Financial, Executive and Professional Risks (FINEX)
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By John Hosie and Tony Flambard | November 20, 2020

Financial resilience is especially important during these uncertain times. Here are some insights into best practices for managing your financial health.

Don’t run out of cash

At the start of the lockdown businesses were faced with the stark reality of reduced income putting pressure on the management of cash reserves. Businesses typically fail because they run out of cash and so cashflow and debtor management immediately became paramount. Careful management of cash flow and understanding of related issues will continue to be integral to the success of all businesses in the future, as it has always been.

Your insurer will want to be confident that the business will survive and that you can pay the excess on any claims. Those insurers providing Professional Indemnity insurance for law firms are bound to provide cover even if the firm ceases to trade and so to them it is integral that the business is financially robust.

Businesses need to ensure that they have an appropriately robust strategy to manage their cash flow as the situation develops, and this article will explore some of the tactics that can be used to help manage cash during the difficult few months ahead, and in the long term.

Know when your debts will be paid

Do you know what your business cash cycle is? During this time your working capital is effectively locked up and inaccessible until you receive that payment.

Having a clear understanding of your business and your working model will enable you to understand when cash following payment for your services will be available. Clear knowledge of the timeframes for getting paid is essential. Accounting practices refer to this as the lockup number, this is the timeframe from day one, (when you first meet, or are instructed by your client) to the day when you are paid. During this lockup period you will need to fund the business through other means, typically this would be bank loans or partner funding.

You need to know and understand your business cash cycle. You should know how long it takes for payment to be received on specific types of work.

Clarity around when payment is required

Debt collection should start on the first day that you meet the client, clear communication and discussion at this stage, should assist in both the collection of monies owed and also reduce any ambiguity over payment terms at a later date.

It is important to be clear with clients as to when payment is required, that this clarity is reflected in your terms and conditions, and that invoices themselves are equally clear in respect of the payment terms and the amount, and also include how clients can and should contact you on any queries. In short make it as easy as possible for clients, they need to understand from day one the cost of the service, the period when payment is required and who to contact with any concerns.

At the point of accepting your assignment you should assess the business risk to you of not being paid.

At the point of accepting your assignment you should assess the business risk to you of not being paid. Credit checks and other references are useful tools and you may determine, in some circumstances, that payments up front or on account are appropriate risk mitigations to take.

Appoint a credit controller

One option is to employ someone as a credit controller who can focus 100% of the time on credit control. Lawyers and other professionals in the firm can then be utilised to work on their areas of expertise.

The credit controller can meet with the partners and/or responsible partner on a regular basis. There should be clear and agreed targets, and reports provided on where the firm is in the collection cycle. Should targets not be met, then a conversation around the causes and issues and a plan to resolve these issues can be agreed and acted on promptly, whatever you do, just don’t ignore the problem.

Control expenditure and costs

One of the essential ingredients of running an effective business is to ensure that a clear management structure and tight control of expenditure exists. Cash, and access to cash, is one of the most important features of running an effective business.

Consider whether profits to partners should be paid out only when the funds have actually been received, and not when they are earned. The balance of partner and third-party funding is important to get right. Operating in this way gives clear incentives for achieving the objective.

Stay in touch with clients

Do you know why payment has not been made?

Early conversations with your clients about the reason for non-payment can help reduce unnecessary chasing and concern and help to maintain the relationship. Ultimately though, you expect and need to be paid, and so those conversations should be clear, robust and supported in writing to confirm the position.

Agreed actions should be followed up quickly to reinforce the message.

During COVID-19 It is especially important that you appreciate and understand the position that your clients and debtors find themselves in. Equally, they must understand the position that you are in. It is essential that you remain in dialogue with debtor clients, especially whilst the debts remain outstanding.

Conclusion

As the UK economy continues to adapt to the impact of the pandemic, and government loan schemes start to wind down it seems regrettably inevitable that some companies will fail. What is likely is that most businesses will face challenges to their cash flow during this period. New costs have emerged; adapting workplaces to meet the changing social distancing rules or providing equipment to ensure that employees can effectively work from home on a more permanent basis.

Pressure on cash flow means that control of costs, knowing when monies are due and required, and working with your debtors are all essential to running a successful business.

The tips provided in this article, whilst useful in the short term, will serve as an appropriate way to control cash flow and manage cash reserves in the longer term and ensure a successful business.

Authors

Lead Associate - Finex PI UK Legal Services

Partner at Hazlewoods LLP

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