Show me the money

With the 31 January deadline having just elapsed, the effect of the recent heightened tax payments on Urgent Issues Task Force Abstract 40 (UITF40) adjusted income is still fresh in everyone’s minds.

The spreading provisions offered by the Finance Act (2006) made it a little less painful cashflow wise, but really the only way to cater for the changes that are now with us is to ensure that this adjusted income has actually been paid by clients. Put more simply, ensure you are not paying tax in respect of work for which you have not been paid.

A firmwide practice of early billing would avoid the need to accrue income and hopefully lead to the cash being collected before the tax payment date. It is not an exaggeration to say that you should be taking any opportunity you can to raise a bill. While accepting that the contingent fee nature of personal injury work may not need to be brought into account, practice managers should focus on their firms’ other areas of work and ensure that procedures are in place, and are being adhered to, that lead to effective, smooth billing patterns.

The basic and longstanding financial factors in all professional practices of high productive time – low work in progress (WIP), write-offs on billing and quick collection – still stand. But there are some obvious points that are often overlooked.

Retain good communication with clients about bills so there are no surprises for them and consequently no delays in paying you. Remember to bill the client at completion of a good job when client satisfaction is likely to be at its highest, not some weeks later when your performance has dwindled in their mind. There will of course be situations when the monies will be on a client’s account, so there is no excuse not to bill and collect quickly.

Boosting lock-up importance

These factors have now together taken on the moniker of ‘lock-up’. What is important is that UITF40 has made lock-up much more relevant than ever before. Lock-up commences upon the first charging of time to a client’s case ledger, all the way through the matter to collection of the fee levied. The main ways of reducing lock-up are:

  • interim billing
  • timely billing and
  • effective and quick payment of fees/costs.

    Never make the mistake of thinking that lock-up can be reduced by:

  • not charging time to the ledger
  • writing off a large percentage of WIP at billing; or
  • writing off bad debts.

    Such practices just result in low profit for the firm.

    Setting targets
    Each individual fee-earner, partner and department should have a target of lock-up days. The equation would be: WIP plus debtor days divided by annual fees, then multiplied by 365 days. This will of course vary between each firm’s practice areas.

    The reason for having a ‘days’ measure rather than an absolute measure is that the quantum of lock-up can be misleading and lead to incorrect assumptions, for example:Partner A, despite only having lock-up of a third of Partner B, has lock-up of 182 days compared with Partner B’s lock-up of 122 days.

    Quantum of lock-up should not be ignored, but the focus of concern would be with Partner A. It should also be remembered that taking the ageing profile of WIP and debtors for both partners into consideration should be part of ongoing finance department controls. Different client matters will of course have different patterns of lock-up and this should be noted – for instance a medical negligence matter will differ considerably from work on a management buyout.

    There is no substitute for a solid internal control function operated by the finance department with authority to question each and every partner as to their portfolio’s performance.

    Bear in mind that poor lock-up leads ultimately to slower cash collection and therefore, at best, lower drawings, and at worst demands for further capital injections.

    Poor lock-up in isolation, or combined with ineffective partner or firmwide working practices, will have a significantly more drastic effect on your practice than the much-maligned UITF40 could ever have.

    Ensuring the cash comes in
    There are some basic steps that all firms can apply. They should:

  • ensure there are productive targets (number of chargeable hours) allocated for all fee-earners
  • provide monthly (not annual) billing targets (the annual biller is the partner who does 80 per cent of their billings in the last 20 per cent of the year, which does not assist cashflow in the middle of your financial year)
  • give WIP write-off targets to provide control of recoverabilities
  • raise collection targets – use of a credit control function can help and can pay for itself
  • implement lock-up day targets
  • implement cash receipts targets each month
  • analyse the ageing profile of WIP and debtors, noting that the 90 days-plus column should be no more than 20 per cent
  • assess support staff vs fee-earner ratios
  • put in place a finance partner or head of finance who will ensure good procedures are followed – the threat of reduced drawings for a month or two can go a long way to ensuring compliance and
  • carry out an external review of accountants, reminding everyone concerned of the key performance indicators being aimed for.

    Many firms will of course have these procedures in place. But are they being enforced?

    History reminds us
    The Law Society issued the core Practice Management Standards in 1993. These were reviewed in March 2004 and form the basis for Lexcel, the Law Society’s practice management tool. One of the sections of the standards is financial management. This identifies requirements such as documentation, responsibility for budgets and variance analysis leading to management analysis of the cost-effectiveness of work and the efficiency of the practice. Therefore, these recommendations should be seen as a reminder of those procedures that should be in place in any practice serious about its financial performance when dealing with client work.

    UITF40 may have been a bolt from the blue, but it should have made all interested parties much more conscious of the financial controls they had often thought were there to make their job more difficult, rather than being the blueprint for how their practices should now be run. Make use of the next 12 months to review your billing cycle and have the controls in place to afford you the necessary protection. Peter Noyce is a partner at Menzies Chartered Accountants