Recognise the symptoms of financial sickness before it's too late

By Jon Miller, Director, Evolve Legal

Be honest – you’re worried about your firm’s financial position.

You are likely to be managing '¨a small firm of solicitors in the UK. '¨Your firm probably provides a range of different services to clients, which may include some long-tail personal injury or similar work. Your firm is well established in your area and considered solid and dependable.

Like everyone else, your firm has struggled in the current economic climate and had to make cost savings in 2010. And of course you are aware of the current changes to the legal services environment – but the Co-op and Saga seem pretty removed from the world you inhabit (although QualitySolicitors’ recent funding announcement sounds a bit worrying).

So what’s the problem? One of your partners is quite commercially minded and understands numbers better than the rest. He keeps a handle on the figures every month or so. There is no senior financial input from within your firm as you can’t afford (and feel you don’t need) a full-time finance director or someone with that level of financial expertise.

You have some idea of the overall billing each month and you know that cash has been tight on occasions (remember two months ago when your drawings had to be deferred by a fortnight so the VAT payment could go out?).

That was a couple of months ago. Things seem to be even tighter now and your senior cashier is becoming more anxious as she tries to balance payments to receipts. What are you doing about those overdue receipts?

You know that your partners should '¨be speaking to clients to resolve these issues, but they are all heads down in their work at the moment, so you’re hoping the clients pay up soon (they won’t). Thinking about this, you realise there are other symptoms too.

It seems that, for the past couple of months, there has been a big panic whenever significant payments need to be made. First it was the VAT, then last month it was the payroll and the PAYE payments. Perhaps it’s time to push your drawings payments back so that these other payments can go out first?

There was also the firm’s professional indemnity insurance: you’ve never had a problem borrowing funds for this, to be repaid over ten or 12 months, but this time the lenders insisted on you all providing personal guarantees before they would lend your firm the money.

You recall that they weren’t impressed about the lack of detail in your management accounts and the lack of any real cash forecasting at all.

Then there’s your drawings. These haven’t gone up for three years now and you’ve already noted that they are not always paid on time. It never used to be like this. You wonder what the problem is. You simply don’t have the information available to be able to work out that, for example, your business is now simply not profitable enough for you to continue drawing at the level you have been used to.

You reduced overhead and support costs in 2010, but you have not seriously looked at your fee earners yet. It seems that the ‘new normal’ fee income level simply is not as much as it was and keeping the current fee earners fed is proving increasingly difficult.

You could really do with analysing '¨the true value of everyone, but it’s not '¨easy to know where to start. And it’s probably sensible to take another look '¨at overheads too.

The bank doesn’t seem to be as supportive as it used to be. It’s made it pretty clear that it won’t countenance any increase in your overdraft facility and, at the previous renewal, it even mentioned the possibility of putting in place a formalised reduction in your borrowings. The next review date is now looming and, to be honest, you haven’t a clue what its stance might be.

Ideally you would want to prepare a business summary to support your renewal submission, so you could demonstrate your plans for the business and how you would want the bank to support you. But again you are struggling to get your thoughts together coherently and you are struggling to know how to model the financial implications of your plans.

If any of this sounds a bit like you, you are undoubtedly not on your own. Many medium-sized and small UK law firms are facing similar issues and it is those who recognise the symptoms early and do something about them that will stand the best chance of turning their businesses around quickly and successfully.

These firms will take their heads out of the sand and appraise their businesses honestly and openly, because standing still is not an option.

jon.miller@evolvelegal.co.uk