Managing cash flow successfully during this period of uncertainty will be the deciding factor between success and failure for most legal practices. Donald Forsyth, partner at Saffery Champness, provides practical guidance on the topic.
Forecast your cash requirements
If you are going to manage your firm’s cash flow, you must measure it. If you don’t already forecast your cash requirements, today is a good day to start. As a minimum, prepare a rolling 13-week cash flow forecast to understand your fixed cost base and undertake scenario planning on the levels of income that might be received.
In difficult trading conditions, updating your cash flow forecast daily could give you the edge over your competitors. It may sound excessive but in extreme conditions, having an exact hold on your cash position could be the difference between success or failure.
Many accountancy packages have cash flow capabilities or add-ons that will help you do this. If not, and if you don’t have the skills to build your own spreadsheet model there are several free to use models available on the web. Your local partner at Saffery Champness is available to provide expert advice and would be pleased to work with you to produce a robust financial model.
Establish the cash burn rate
The cash flow forecast should show you the rate at which your business consumes cash. Identify cash outflows that are not business-critical and stop them immediately. We saw in the global financial crisis of 2008 that law firms that acted swiftly to cut costs were the ones that came out the other side in the best shape.
Maximise cash coming in
Your billing and credit control procedures have never been more important; many firms’ invoicing and cash collection procedures may benefit from a booster shot! Review the balances held as work in progress and due to you from clients. Make sure partners are billing as soon as they possibly can, and contact clients to discuss the timing of collecting your outstanding fees. Your clients will be in the same position. If you can agree a plan then at least that gives you some certainty for your cash flow planning even if they require slightly longer terms to settle in full. Call them the week before payment is due to ensure that everything is clear and that they have all the necessary paperwork and approval to process the payment to you. Contact clients the day they go over the agreed terms. This will create extra work for fee earners, finance staff and partners. Irrespective of the procedures in place, many firms find that a telephone call from the partner is still required to extract payment from clients.
When negotiating with clients use your cash flow forecast to help set terms that’ll get cash into your business precisely when you need it. For example, by obtaining deposits or negotiating timetabled stage payments.
Be extra vigilant when signing up new clients – will they be able to pay you? It is better to miss out on an opportunity than have a bad debt – you can’t get your time back.
Review your property arrangements and consider whether you are able to apply for the grants available from local authorities as announced by the Chancellor recently.
Although it is never popular, some firms may need to consider a cash call on partners to increase capital accounts.
Minimise cash going out
Look to contact all your contracted costs, for example landlords, suppliers, finance lenders, government and request delayed payment terms or holiday payments where possible.
Review your employee base and consider options for reducing costs. This could be reducing hours, unpaid leave or sabbaticals, subcontracting staff to other businesses and, as a last resort, redundancy. There is an urgent need for firms to assess the anticipated utilisation of staff and partners. The supply and demand for chargeable time must be kept in equilibrium. To what extent can a shorter working week and the associated reduction in costs be used to minimise cash outflows? The possibility of furloughed staff earning 80% of their normal wages and other staff on reduced hours – say 4 days – also earning 80% of their normal wages will present some challenges.
Clearly there are employment contract issues to consider for both employees and directors – hopefully good employment law advice is not too far from your door! Having made savings with employees, restrictions on monthly drawings are an obvious and relatively easy cash saving measure to implement; a sharing of the short-term pain felt by employees hopefully for mutual long-term gain.
Keep your suppliers informed. Just as you like your clients to keep you informed of their payment intentions, treat your suppliers in the same way. Be upfront with them about when you can pay. Don’t make agreements you know you can’t keep.
Make use of the assistance provided by government
The government has announced a number of schemes to help keep the economy going and to protect jobs. They are summarised below, but see our designated Coronavirus support page on our website for full details and analysis:
People funding measures
Loans to businesses
Check your insurance policy to see if you have cover for business interruption. This type of clause covers the consequential loss of income or increased costs of a business interruption and may cover denial of access to your business premises or loss due to notifiable diseases. The terms and conditions should be examined closely as many standard business interruption policies will not cover pandemics. If in doubt, check with your insurance broker.
It would also be wise to let your insurer know that you now have staff working from home and your office is closed. As staff are most likely doing desk based work there shouldn’t be any increase in premiums although there could be the need to conduct periodic external inspections of your offices.
The theft of cash by scammers is painful at the best of times. There are already a number COVID-19 scams in operation. Other than the Time to Pay Scheme where you need to call HMRC as noted above, there is either no application necessary, an online application or the relief is provided automatically. Nobody from local or national government will contact you to help you apply for any of the available assistance. Be very aware of the heightened risk from both outside and within.
This article is based on the assistance available as at 2 April 2020. If you need help please contact your local Saffery Champness partner or contact our help desk E: [email protected]