Cash on delivery: firms must not fear billing clients

Robust cash management is a key component of ensuring financial stability and solvency. So
why allow bills to remain uncollected, in some cases to the point of seeing a firm fail?

Maintaining adequate cash flow may not be a significant problem for firms that have vast financial resources and legions of people whose sole purpose is to manage this aspect.

However, for many,
maximising cash flow may be
just as important to the overall success or failure of the firm as winning a courtroom battle is
for the client.

A common lament of many firms is the fee earners working all hours to generate billable income each month, only to barely
break even, let alone show any significant profit for all that hard work. So, how do you improve cash flow and translate that into bottom-line profits?

Firms and individuals must do everything possible to ensure clients pay promptly and within terms. Many lawyers do not like to get involved in cash collections, leaving the task to accounts, support staff or third parties.

However, the lawyer (having the direct relationship) has the best chance of getting the bill paid as clients are far more likely to respond to calls from their lawyers than someone in accounts. This is especially true during ongoing litigation, when the clients would fear that a call regarding an unpaid bill could adversely affect the outcome
of their case.

Poor cash management affects so many aspects of the business, most notably the ability to meet VAT, PAYE and other taxation on time. Most firms have large cash drains at the end and beginning of every month, pressures on cash that typically include salaries, insurances, lease and finance agreements.

Then there are other large
cash items such as PII and associated ‘essential’ expenditure, which all need to be meticulously planned for payment at the most cost-effective time.

One solution is to obtain either a short-term loan or an increased working capital facility from the bank. This is not necessarily a major problem as there are many lending products tailored to the legal sector, but it is an expensive option and adds costs.

In an ideal world, running costs and overheads should be funded from normal trading. Borrowing to fund running costs often wouldn’t be necessary
if the capital locked up in the
firm by way of debtors and WiP
is released.

Developing and maintaining a good cash flow strategy, and understanding how to use and not abuse funding or credit lines, are all key factors in maximising cash flow.

However, the bottom line on your bottom line has a lot to do with being conscious of the costs of doing business.

Each month, there are business costs and expenses that will remain constant. A rolling 13-week cash flow forecast is essential to allow effective management of the office bank account. That can mean micromanagement down to a single payment item that has
to be made.

It is critical to ensure there is enough liquidity on the days that ongoing payments fall. It may be stating the obvious but how many firms know what their daily income and expenditure requirement is today?

UNLOCKING CAPITAL Get the point-of-sale bit right. Lawyers are accountable for getting their bills paid. Clients should be aware of the financial commitment and be able to clearly demonstrate the  ability to pay. Partners must be closer to and understand the costs and overheads of the firm, when they are due and how those commitments will be met. Firms must have a detailed and robust cash forecast both annually and a rolling granular 13 weeks as an absolute minimum requirement. Allow for a close working relationship with the bank around peak requirements. Partners should understand the cash requirements of the business and how this relates to the income needed or level of fees to be billed. Never confuse profits with cash flow; there is a difference between the two, especially when declaring a profit and subsequently a tax liability.

SJ

Tony Brown is the founder of consultancy AGB Legal