SRA is no safe harbour in cash-flow storm

Recent comments from the SRA about the high number of firms potentially in financial difficulty may make the headlines, but they do not help those law firms struggling with cash flow.

So, who should they turn to first for help?

Firms are being urged to seek help from the SRA but, as explained in its online note about financial stability it ?clearly does not provide ?financial advice:

"….your first port of call may be your assigned member of our Supervision team. They will talk through your problems from a regulatory perspective and consider what can be done. Bear in mind that the SRA's concern is to protect clients ?and the wider public interest and we cannot provide legal or financial advice."

Given the final words of that statement, should a firm's first port of call really be the SRA, rather than a firm of accountants experienced in advising law firms and who may not only be able to turn matters around but also deal with the SRA on the firm's behalf if that ?becomes necessary?

Poor behaviours

The SRA's note also sets out a list of poor behaviours to avoid. While agreeing with the items on the SRA's list insofar as it goes, it tends not to focus on the reasons why law firms are currently failing to generate healthy cash flow. Identifying these underlying issues is necessary before effective remedial action can be taken. That is a task accountants should be best qualified to undertake.

So what are some of the current causes of poor cash generation that can lead to a cash crisis in a law firm?

Less WIP

A downturn in the value of business, caused by fewer instructions or lower prices or both, will lead to less work in progress being available to be billed, leading to less cash being received to pay overheads. Unless this cycle of paying out more cash than is being received is stopped by taking action to cut overheads and generate more revenue, a firm will at some point run out of cash to enable it to continue in business. Being able to nip this problem in the bud at the earliest possible moment is crucial. As well as preparing realistic cash flow projections, monitoring input can provide early warning of problems ahead. An input report showing the value of work being done on a weekly, if not a daily, basis will indicate future shortfalls in work in progress and eventually in cash, and should be one of the most important financial reports a law firm produces.

Some areas of work, including claimant personal injury, are a severe drain on cash because of time between instructions and receiving payment, the work having to be financed in the meantime. Identifying which parts of a firm are haemorrhaging cash because ?of excessive lock up of work in progress and debtors, and then taking steps to cut them out of the business, will be necessary if a firm's future is to be secured.

Internal disciplines

However good the quality of a firm's underlying business is, lack of internal disciplines to generate cash may ultimately destroy it. Solutions to 'take control of cash' are likely to include:

• creating a 'partnership' between a quality financial director, and a managing partner who together take control of cash management;
• partners putting the firm's interests before their ?own agendas;
• financial education so everyone understands ?'how to drive cash' (including how to talk to clients about money);
• effective financial measurement and reporting to identify necessary actions to accelerate cash generation ;
• centralising control ?over credit risk when accepting instructions, billings and cash ?collection; and
• achievement of cash collection targets linked ?to partners' drawings. SJ

Peter Scott is a solicitor and a compliance consultant at ?Peter Scott Consulting. He will be speaking at CLT's forthcoming Financial Stability Conference in London, on 21 October 2013.