Regular, relevant and digestible management information allows law firm leaders not just to assess how well their practices are performing but also to take early remedial action if necessary. Trouble is, few have the right information, says Tony Brown
It's an old adage that if you can't measure it then you can't manage it, but what do you measure, what information is needed, the frequency it's produced and how do you interpret it to determine actions, outcomes and consequences in the context of law firm financial management?
Let me start by saying there is no one-size-fits-all approach to the amount or level of detail needed around the financials of a law firm, despite what some experts, banks, finance houses and accountants, may have you believe. This is very much down to the size and type of firm, the complexity or simplicity of the business model and to a large extent the needs of the partners or directors and the respective interested parties including the aforementioned banks etc.
The principles of good management information are fundamentally the same whatever the business model or size, however the variety and level of information I have seen used across a large number of firms - or not used, as is more often the case - ranges from the sublime to the ridiculous.
Examples ranging from none or hardly any management information produced at all, to some all extravagantly detailed MI packs that weigh as much as a small encyclopaedia. The latter usually look magnificent, with high tech graphs and complex ratios but unfortunately even the most qualified of minds would struggle to understand what some of the content actually means.
Real-time information
Management information is about having real-time information about the financial performance of the business. It shows business owners' performance against a wide range of key performance indicators (KPI's), progress against the strategic and tactical business plan. It also acts as a call to action to address issues and as a catalyst to recognise successes.
It is however, only a litmus test of how a business is performing at any given point in time and it's important to emphasise here that it is only a small window in time, and therefore the frequency it is produced will be vital to build a complete picture and identify trends.
In business no one likes surprises, rarely are they of a good kind. Therefore regular, accurate management information should ensure there are none, and it allows business owners to assess performance and act quickly to address any shortfalls.
In the absence or lack of timely and robust MI how do you know if your business has a cash flow problem, is profitable, is or isn't performing to budget or has individuals not delivering to expectations?
Early identification of pressures around cash flow in particular could mean the difference between survival and failure. I've seen too many firms struggle with cash flow pressures that if identified earlier could have easily been avoided; this applies equally whatever the firm size. Identifying a problem early allows remedial action to be put in place quickly and is the key to financial stability, a phrase we constantly hear from the regulators and industry commentators.
It's not just about identifying gaps, issues and shortfalls it's also about highlighting successes and these are equally as important. If you can see an aspect of the firm that is successful, understand why it is successful and then apply that learning across the firm, that can only be a good thing.
Single view
Management information is usually the only measure that a bank or finance house will see to assess the performance of a law firm. The information sent to them will invariably influence, and to an extent determine, the perception they have of how the business is performing and how the business owners are managing it.
Banks, finance houses and accountants normally require sight of regular MI and the associated commentary behind the numbers. This supports any current or future lending requirements, helps with forward tax planning, supports investment decisions, cash forecasting and strategic planning.
Any decision a bank makes to support a funding or working capital request is based on the information the firm provides and will either succeed or fail depending on the quality of the content and how it's presented. You have to assume the person reading the MI knows nothing about the business or the people who own and run it. It's important to paint a picture, even if the numbers themselves aren't as good as you would want. Well-structured MI with a reasoned explanation, rationale and commentary and clear actions to move the business forward is more likely to succeed than providing nothing at all.
I recently assisted a firm who were looking to acquire a smaller firm, were seeking additional funding from their bank to integrate the two businesses and needed specialist advice around organisational design, business structure and tax planning.
They had some MI but not in enough detail that would either convince the bank to support the funding requirement, allow robust due diligence to be carried out (on both firms) or determine what the expected outcome would be in terms of cost savings and income/profit improvements. To say what they were working with resembled the 'back of a fag packet' is a bit unkind but in essence, it might has well have been.
Lending agreed
In producing a detailed 'disclosure bundle' we were able to present a proposal to the bank that gained immediate funding support. This proposal, supported by robust management information, clearly illustrated what the benefits were of the acquisition, the cost savings that would be made, the long-term improvement in income and of course bottom-line profit.
I mentioned earlier that the quality and quantity of what's produced varies; however, there is a difference between what is needed and what would be classed as add-ons or nice-to-know.
Personally I don't believe you can have enough information about your business but it has to be a balance, there's little point in producing information that's not essential and will never be used so here are my top six 'must haves'.
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Executive summary and commentary - An aspect that often gets overlooked but is essential to provide an overview of performance and recommended actions. This should be no more than one page, compiled by whoever produces (and understands) the information and will usually cover income, profit & loss, cash movement, costs management and any relevant events.
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Detailed cash-flow forecast - An absolute must, cash is king in any business so a detailed rolling 13-week forecast, historic and forward looking will show how well the business is performing in respect of cash collections and costs management. It will allow for meaningful discussions around working capital requirements, vital when managing periods like Easter and Christmas holidays where cash collection is historically slow or when VAT, salaries, PI premiums etc. fall due.
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Income performance summary to budget - This would typically show individual fee earner and practice area performance against budget. It will highlight over achievement and also under achievement. It should prompt remedial action in cases of underperformance or recognition of performance that exceeds expectations. This is one of my favourite items of MI and can be used to incentivise fee-earning staff to deliver income above budget. However individual performance management in SME law firms rarely features. I wonder why.
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Income and profit summary by practice area - It's important to understand which areas of your business are profitable and those that are not. For example the old question of whether residential conveyancing is profitable should be answered here. I wonder how many SME law firms know what the cost/income ratio is in each of their practice areas?
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Rolling profit and loss account - A month by month guide to overall profitability is an absolute must. Along with the cash forecast & balance sheet perhaps the most used pieces of MI and show at a glance progressive performance throughout the year. All are key tools to help determine any investment strategy, tax planning, bank requirement and any remedial action needed to bring performance in line with budget/plan.
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Rolling balance sheet - The business on a page, and although not the most exciting piece of MI, the balance sheet is one of the must haves with all assets and liabilities and various notes to explain what each line means. Banks tend to focus on the balance sheet more than the P&L to determine if a business is solvent and has good reserves.
You could add a wide range of other MI such as trend analysis, earnings schedules, overheads breakdown etc. These are not essential unless you want this level of detail each month.
There are a few others I would strongly recommend that partners and directors regularly see and challenge, such as bank statements for both office and client. Yes, there will be thousands of them potentially, but as business owners wouldn't you want to see how your (and your clients) money is being managed and where it is being spent?
Bank statements are the most telling pieces of MI as they are real time information in a world where cash is king. Don't do it every month and occasionally ask for them unannounced, this shows a keen eye for what goes on and keeps management and staff on their toes: the boss is watching!
Creating actions and generating momentum is really what management information is all about. How do you improve the bottom line, what levers need to pulled (or buttons pushed) to drive the business forward. Robust management information, produced at least monthly - and then used - will allow business owners to get under the skin of the business and plan for success.
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POCKET NOTES Management information |
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· Cash flow forecast – Have two versions, one that is the daily working document and looks at the immediate past and future, usually 13 weeks out and backwards. Have another that looks at your annual cash requirements plus any planned Capital Expenditure, this helps when discussing any potential funding needs.
· Rolling P&L – Don’t get phased by the up and down nature of a rolling P&L. Ensure that any provisions made are explained, areas like WiP movement can have a dramatic effect on the bottom line. Stating the obvious don’t confuse paper profit with cash in the Bank the two rarely match!
· Rolling balance sheet – Understand the assets versus liabilities position, debtors, WiP and creditors all impact the balance sheet so make sure that everyone understands the numbers sitting behind these areas. Is your firm Solvent and have a growing balance sheet surplus?
· Income performance – Know how you make money, what is your pricing strategy if you don’t know which of your practice areas and fee earners are profitable.
· Income performance to budget – For all the operational savings you can make and prudent management driving income performance against a stretch target/budget is the ultimate profit improver!
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Tony Brown runs AGB Legal, a consultancy dedicated to improving law firm performance. He is a former CEO with a multi-disciplined regional law firm which gained one of the first 50 alternative business structure licenses.
www.agblegal.co.uk
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