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‘Cash is king’, the saying goes – but the results of a recent survey of the legal mid-tier shows that many law firms are failing to heed this old adage, leading to working capital issues.
The economic climate continues to challenge the legal market, despite signs of growth in the UK. Tremors in the market over the past 12 months may have acted as a wakeup call to the sector that firms need to get better at managing working capital – but as the results of the Crowe Clark Whitehill 2013 Solicitors’ Benchmarking Survey show, many firms still need to improve their billing and debt collection procedures.
39.5 per cent of firms surveyed reported more than 150 lock up days, and many firms are still taking a long time to collect billed fees, with 69.8 per cent reporting over 60 days to collect on bills delivered. This is the third year of the survey, and the third in which we have seen these trends in the sector. In a difficult market, it would logically follow that firms would be looking to exercise tighter control over cash flow. Managing lock-up by ensuring bills are issued and work in progress (WIP) reduced promptly, followed by efficient debt collection, is a critical factor in the law firm cash cycle. Failure to manage working capital correctly could lead to deferred drawings and profit share payments, and with more scrutiny from the banks on lending to law firms, good cash flow management is of critical importance.
So why does working capital management continue to pose a problem for many firms? One answer could lie in the enormous pressure many partners are under to bring in new work, and a corresponding lack of discipline in client acceptance procedures.
The legal market is more competitive than ever, and, for many partners in mid-tier firms, the ability to bring in new work is often tied to performance measures. But winning new work is ultimately fruitless if there is no financial gain to be made, and there are several factors that firms need to consider before taking on a new client. Working capital management starts at the point of deciding whether or not even to accept a client instruction.
Partners and fee-earners need to understand the financial life-cycle of their prospective client and the impact that it has on the firm’s finances. Firms should carry out due diligence on potential clients, looking at their ability to pay for services in a timely fashion. Close attention should be paid to the fee arrangement – will it be a fixed fee, on a time basis, will there be a ‘success’ element or will it be wholly conditional with no guarantee of a fee unless the case is won or other similar measure.
For non-conditional fee work, partners should still consider what they are agreeing with the client, such as the terms of payment and a billing schedule for the work.
Putting these protocols in place will help to ensure that new work actually brings in revenue, rather than just creating extra work for the firm, and cash flow headaches further down the line.