Back to Basics for Lawyers: Finance and Financial Management

Welcome to the February edition of Back to Basics — a Business Briefing for Lawyers. In this edition I focus on Finance and Financial Management — an absolutely crucial area that every fee earner needs to be involved in.

Financial management starts from a simple premise — if you can win and keep clients profitably then you will succeed. The question is how do you assess the profit?

Consider what reports you need to work with every month—and how to analyse these. Think about looking forward and doing some predictive calculations to show you how you can manage financial projections over the course of your financial year.

John McNeill, Business Restructuring Director at BDO LLP considers the premise “Cash is King” – and it is! Without positive cashflow every business will struggle to survive, never mind progress. Rendering Fees is one thing — recovery of fees is an essential part of every fee earner’s duties.

It’s not about the money…..or is it?

There’s an old adage that says “It’s not about the money….” but, at the end of the day, it almost always is! It is true that if you win and retain clients in a cost effective way — that means that you make a profit out of every bit of business you do for a client — then the money will take care of itself, but it’s nice to be sure. This means that you need to check your financial performance on a regular basis.

It is simply not good enough to look at your Bank balance every so often — it might be good — or, on the other hand, in times of a downturn it might be very bad indeed. There is a range of reports that you should consider at least once a month. These include monthly Profit & Loss Reports, Fees Rendered and Recovered Reports (by fee earner, if possible), Outlays and Expenses Report (if your system provides you with one), Client Credit Balances over £500 (although it’s better to run this Report every week) and client Debit Balance Reports. If your Practice Management system provides it, you should look at an Aged Fees Report — and then you can consider what Credit Control steps the firm needs to take to manage this position. Get into the habit of looking at the figures monthly and speaking with your fellow fee earners about their performance.

On an annual basis, review your results and compare them to results in previous years using a range of Ratio Analyses—this will allow you to compare performance without having to try to compare actual figures. This will also tell you if your are performing better or worse than in previous years. Consider your Net Profit Percentage – how much of every £1.00 you generate in revenue do you get to keep?

What about your Debtor Days Ratio — are clients taking longer to pay you than they’ve done in previous years? What percentage of Revenue is your total Salary Bill – and is it a higher or lower percentage than previous years? These measurement will give you some clues as to the firm’s financial fitness.

Financial Management

It’s all very well reviewing your figures after the event, but “how can I manage forward”? This is a question I’m frequently asked by clients. My answer is always, set a budget for the full year, lay it out on a month to month basis and then overwrite the figures with the actual results each month. When you do that you will find that over the course of the financial year, as the actual figures replace your projected figures you will be able to gain an insight into how your firm is likely to perform by the end of your financial year.

The first stage in the process is to set a budget. For whatever reasons best known to themselves, many firms don’t normally set revenue and expenditure budgets. As a result, they have no real basis to determine their performance. You will need to use a spreadsheet for this. It’s a simple and straightforward task to prepare a set of Revenue and Expenditure Projections. Set out the spreadsheet showing the Revenue and Expenditure Items in the left hand column and along the top of the spreadsheet put the months—starting from the first month of your new Financial Year. Think carefully about what the firm is likely to generate by way of Revenue and what it is likely to spend on each item in the coming year — and in a worst case scenario, take the total of each Revenue and Expenditure from the previous financial year, divide it by 12 and then put that figure in each of the months over the year — Revenue at the top of the columns and Expenditure below it. Then add up your different revenue streams and deduct the total expenditure. This will give you your net profit or loss each month. You should also show a column for Totals at the right hand side of the spreadsheet so you can add up each row and that will show you your annual totals for each Revenue and Expenditure item.

At the end of each month, overwrite the figures for that month with your actual figures. If the spreadsheet is structured properly, it will recalculate your figures for the year.

By building in a few additional pages to your spreadsheet you can extend its functionality and look at revenue per fee earner, fee earner averaging and revenue comparisons (where you can set your budgeted figures for the month against the actual result for the month). This means that you can see on a consistent basis which areas of the firm are generating more or less than you had projected. From an expenditure perspective, you can again carry out a comparison against your budget and very quickly you will see any items where there has been an overspend or an underspend. This gives you a “heads up” on something that might be going on that you had not expected or budgeted for – and at least gives you a chance to do something about it before it gets out of hand!

There is no magic in the numbers, but if you use a tool like this you will give yourself a chance to head off problems at the pass — or in the case of revenue, work out why fees in certain areas are not performing as you predicted and do something about it — and where certain work types are performing better than expected, work out why that is and THEN DO MORE OF IT.

Simon says…..

As Brian has noted this month the role of the Partner is a multi-faceted one. Obviously a good legal analyst is the result of training and education – that prepares you for being a lawyer. Then, when you make Associate, you are expected to be able to generate your own clients and revenues and then, when you make Partner, you are expected to contribute to potentially all the senior roles – Staff Partner, Client Relations, MLRO and the “dreaded” Cash Room Partner (or as I heard it described recently as ‘The short straw’). The role of Cash Room Partner can be daunting as it does deal with quite a lot of different things – Law Society inspection, HMRC, VAT returns, PAYE & NIC, cashflow, surplus, accounts, budgets, etc, etc are aspects that Cash Room Partners need to keep under control whilst often being expected to keep up a full-time fee earning role as well. A good cashier is helpful and I know many a Cash Room Partners who operate with a high degree of delegation in this regard— which is fine — but you cannot delegate accountability. Everyone knows where the buck stops.

So, take some time to become conversant with all of the aspects, not in-depth, but a knowledge of the parameters and understanding of the meaning in the numbers. I suggest that if you are not in the habit of ‘presenting’ the management accounts to your Partner colleagues each month , then do that. This is an excellent way of learning on the job. It will also help your colleagues to raise issues and ask questions. Time and again the Clients Trial Balance report, Outstanding Fees report and Bank Statement get circulated each month. Everyone looks at the last couple of pages and because they don’t understand them, simply pass them on. These same firms look forward to the Accountant’s annual report approximately 6 months after the financial year end to see if they made any money by which time it’s far too late to do anything about it! No, nowadays whilst Cash is King in terms of month to month sustainability, it is vital that some effort is made within the firm to understand the current trading position. Take steps to ensure that there are no nasty surprises at Financial Year End because everyone who should know what the position is does know, every month, and are helped by their colleagues to understand and improve this where possible. It’s no use to a older Partner that there is no money in the firm. It’s no use to a younger Partner that there is no money in the firm. It is vital to all that there is demonstrable viability in the firm at all times – and all Partners need to work together to achieve this to the best level possible and keep it there.

Simon Greig is Sales Manager of LawWare Limited, Edinburgh. Contact Simon on simon@lawware.co.uk

Cash is King!

As we see some very early signs of green shoots of recovery you may think that an improvement of the economy is just round the corner. However, this does not disguise the fact that what has become the most important factor in running any type of business today is cash flow management. We have all read the horror stories in the press recently of the effect that the adverse weather in December had on many a business cash flow. The sectors that have been particularly badly hit include retail and leisure & hospitality, both of which rely heavily on consumer spending. You can imagine the effect if you have budgeted for a certain amount of income and you are hit by a sudden shortfall in revenue. In days gone by when your local bank manager perhaps had the ability to grant a short term overdraft to tide you over, nowadays that is not so likely to happen. However, you should keep your bank in the loop as they are more likely to respond favourably if you keep them informed. As a rule, your bank does not like surprises!

If you are experiencing cash flow difficulties and are unable to pay your ongoing liability to HMRC in respect of VAT & PAYE then you should approach them to enquire about a time to pay order.They will normally give you a fair hearing and, as long as your proposals are acceptable to them, they could go with it. However, a word of warning. If you default in any arrangement that you have negotiated with them, it is normally all bets off. You should always bear in mind that HMRC have to be paid sometime. In a non cash transaction business where credit is given to customers, collection of cash is of paramount importance. If you operate your own credit management system it is important from the outset to ensure you are dealing with the correct entity and also set realistic monthly credit amounts for customers. Try and spot any potential bad debts before they happen and gather as much data and knowledge about your customers. Of course, many owner operated businesses have difficulty in credit management and more medium to small businesses are turning to Invoice Discounting or Factoring. This is where the firm invoices its customer and the factoring company immediately pay you an advance of up to 75% of the sales value and the balance when collected. This can ease your cash flow position but it can be expensive especially where a bad debt is suffered and the funds already advanced by the factoring company have to be repaid to them. Again, the golden rule is to try and avoid bad debts. This short article only gives you a flavour of the subject and I would be happy to discuss this topic further if you or any of your clients have any specific issues.

John McNeill is the Business Restructuring Director, BDO LLP and can be contacted at 4 Atlantic Quay, 70 York Street, Glasgow G2 8JX, tel: 0141 249 8409, mobile: 07896 114 904, email: john.mcneill@bdo.co.uk

Boost your Productivity using Word Templates:

  • Customised standard letters save time
  • Option to personalise letters to clients
  • Uniform appearance every time
  • No more missing or corrupt documents

The Styles Bank provides document management services as well as “packaged” document sets for your use. Contact us at info@thestylesbank.co.uk or on 07855 838395 for a brochure or more information.

Contact us

Brian O’Neill LL.B MBA, Business Consultant, t. 01294 833220, m. 07855 838395, e. brian@drakemyre.co.uk

Simon Greig is Sales Manager of LawWare Limited, Edinburgh. Contact Simon on simon@lawware.co.uk

LawCloud: Legal Case, Matter and Practice Management for Law Firms UK

Back to Basics for Lawyers: January 2012

Welcome to the January edition of Back to Basics — a Business Briefing for Lawyers and a belated Happy New Year to all my readers.

This month the focus is on taking action.

Even the best laid plans depend of solid action to make them happen but how many times have those best laid plans come to nothing because of your own inertia.

The best way to get to your objective is to actually do something about it.

We will see in this edition of Back to Basics that even the smallest of steps are important.

Any journey must start with a single step—don’t let your hopes and ambitions be thwarted by failing to put one foot in front of the other!

If you need any help with your plans or putting them into action, please get in touch with me—I’d be delighted to help.

Brian O’Neill LL.B MBA
Business Consultant
40c Drakemyre
Dalry
North Ayrshire
KA24 5JE
t. 07855 838395

e.   brian@drakemyre.co.uk

I’ve got the plan……how do I start?

In the December issue of Back to Basics we looked at Forward Planning and made some recommendations of what to do and where to start. You’ve all don’t that….right?

January gives everyone an ideal opportunity to throw off the old and look to the new. It’s a new year with a whole twelve months to look forward to. If you’ve really taken time to think about what you’d like to do in 2012 and how you’d like to achieve it, then taking action is the very first step to achieving your objectives.

It doesn’t matter whether your plan is written on a single sheet of paper or is a professionally bound and presented plan – without taking that first step you will never achieve anything.

All the best plans depend on action. If you’re travelling to your destination, you need to start somewhere. You might not be able to see your destination but you usually know how to get to the end of your street. Start with the end in sight and take those small steps that will lead to achievement of your goal.

January last year saw the first publication of Back to Basics for Lawyers. I had had an ambition for quite a long time to produce such a publication—short sharp management tips and recommendations that take up no more than two sides of an A4 sheet of paper (for those of you who print this off).  I planned out the topics for the first twelve months, I spoke to some colleagues and asked if they would contribute occasionally (and to Simon who I asked to contribute in every edition) and then went about  listing the things in each topic that I wanted to cover—and the list grew and grew and grew……..but I still hadn’t achieved anything. I didn’t actually achieve anything until I typed my first word—then my first paragraph and, finally all the words for the first edition. I then assembled the Briefing into the style of publication you are now reading and incorporated Simon’s piece. At last, Back to Basics for Lawyers was born—and here we are, 12 months and 12 editions later in a brand new year and yet another edition of Back to Basics for Lawyers.

All this couldn’t have happened without those first words. All the planning in the world wouldn’t have achieved anything and it would all still have been a dream.

If you truly have done some work in setting your objectives, start to realise them by taking even the smallest step that will help you on the way—and if you haven’t yet started—don’t you think it’s about time you did? Nobody else is going to do it for you!

Simon says…..

Growing your business – January 2012

In last month’s article my main point was this – it is possible for any business to grow in this economy. It requires thought, it requires knowledge of your clients, it requires the ability to put yourself in the client’s shoes and imagine a better buying opportunity. I asked you to think about why your client is your client. Hopefully you have had some quiet time to contemplate this.

The potential for a law firm to grow is different for each firm. A sole practitioner is different from a chamber practice, which is different from a corporate law firm; so the strategies have to reflect this. But the principles for increasing turnover are the same – these I also talked about last month – attract more clients, or, increase the amount each client spends (ideally both).

Attracting more clients – promote yourself. It’s tremendously effective when carried out well. Doing it well means being clear about the message and the benefits, and, targeting this at the right recipients. Here are a couple of examples – having thought about things over the break you may feel that at this time of the year a good message to target your existing clients with is – the importance of up-to-date Wills and the benefits of Powers of Attorney. An alternative plan could be one that says – we need to remind our clients of the range of services we provide. The former plan is value based; it offers some information and advice up front and persuades the recipient that there is some knowledge and potential advantage to be gained from further investigation – when done correctly it also achieves the second plan’s aim. Embarking on the second example is not necessarily a bad plan, but it is difficult to establish a ‘call to action’ with it, i.e. give a reason for the recipient to contact you. You could put an ‘offer’ into the message, for example a free or discounted will with every purchase, but in my opinion the overall message is weakened by being price led as opposed to quality led. Now that you have spent some time analysing your clients – come up with the best plans that cover all types of clients so that everyone gets at least one message this year.

Increasing the client spend – this often requires some even smarter thinking as there are a few strategies you can examine. There is the discount store scenario – how much can you deliver for a set fee. This is often useful for conveyancers, particularly those that perceive the market is price led. Understand what you can deliver for the market rate and call this the Bronze Standard, then create 2 higher levels of service, the Silver Standard and the Gold Standard and specify what you will provide and a price for these. When someone asks for a quote, offer all 3. The questions that follow tell you all you need to know about the prospect and how to handle them in terms of whether they are truly price driven or if they might appreciate a little more by way of service and fee. These are the clients that you must identify, across the board. Those that appreciate a little more and understand that they need nurturing; they appreciate the concept of value, so mark them out for this because you can provide them with more services. These are your good clients not the ones that buy on price.

All firms must be able to identify and send messages to their good clients. Use your Practice Management System to flag these clients and keep their details up-to-date. Regularly correspond with them, 3 or 4 times a year, without fail. It’s no use just doing this sporadically. It must be regular and reliable, in order to build a relationship and persuade these clients that you are interested in them and that you do have their best interests at heart. Don’t expect massive results immediately, just because you send 1 letter. But by the end of the year you should be able to see the difference, easily.

Have a good 2012 by making it a good 2012.

Simon Greig is Sales Manager of LawWare Limited, Edinburgh. Contact Simon at simon@lawware.co.uk

Financial Actions

I make no excuse for revisiting this topic over and over again. You might have the most complex and detailed plan and be desperate to put it into action but you will never ever achieve it unless you have the funding to make it happen.

In any plan, you need to carefully set out your projected revenue and expenditure—what income you calculate you will generate when you carry through with your plan and how much you will need to spend to achieve your objectives. It is incredible the number of legal firms that do not have even the most basic financial projections and yet still expect to be successful year on year.

Why is it that in any business plan, a large portion is taken up with the financial aspects? Simple really. Without the right funding any plan is doomed to failure from the start.

Review your plan in conjunction with your financial projections—your Profit & Loss and, most importantly, your Cashflow Projections. It is surprising how many lawyers still struggle with projections and have difficulty explaining the difference between profit and cashflow only to find out the difference late in the day when they are showing decent profits but have failed to collect the cash due to inadequate credit control policies!

As Mr Micawber in David Copperfield famously said “Annual income twenty pounds, annual expenditure nineteen, nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”.

Make sure your plans are properly costed out and if you’ve not yet done that, this is one of the very first things you need to do.

Sit down, work out what you and the other fee earners in the firm are likely to generate in the coming 12 months. If you’re really stuck, have a look at what was generated for each fee earner last year and consider whether there is likely to be an increase or decrease in that level. You should know your business and the challenges in the market, be able to take into account what impact your plans will have and come up with figures that you can support.

From an expenditure point of view, take each of your expenditure headings and really challenge yourself on whether you need to spend this money or not—you might want to spend it on this item or that but you might not need to spend it—know the difference and discipline yourself to spend only what you need to spend. Do not trust your finances to luck—the odds are always stacked against the gambler!

Don’t wait to get it perfect

If you really want your plan to fail, then try to get it perfect. Learn quickly that there is no such thing as the perfect plan—it simply isn’t achievable.

Now, I’m not saying that you shouldn’t aspire for excellence, but if you’re trying to create something that’s perfect, you’ll spend so much time trying to create that perfect plan that you’ll never get round to putting it into action.

Consider what options are available to you. Ask your partners colleagues and staff. Make sure you have a common understanding of the problems and when you gather the information from these sources you will have a list of what’s available to include in your plan (there is a specific workshop that I run that helps you with this part of the process). This will help you develop a plan that is robust and resilient and up to the challenges you are facing.

Every plan has some sort of shortcoming or defect and you’ll usually only find that out when you start to put it into practice. That doesn’t mean that you shouldn’t start until you’re sure or that you need to think through every conceivable option.

You should strive for excellence and part of that exercise is setting down the actions you intend to take—what comes first, what’s next and what’s after that. And so on and so forth. You’ll learn fairly quickly what’s working and what’s not and which of your assumptions (and you will need to make assumptions when putting your plan together) work and which don’t.

Think about it this way:

You need to be in motion before you can change direction. If you don’t like the direction your business has been going or the results you are getting you need to do something about it. You can only do that something if you are in motion—and they way to get into motion is to make a start. Once you’ve build up some momentum it’s likely that you’ll realise that there are opportunities available to you that you might not have thought about and because you’re in motion you may be able to avoid some of the threats that are out there.

If you are standing still when the threat comes along it can be very difficult to avoid it and that can have a disastrous impact on your business.

Make sure your plan is fundamentally sound and not fanciful or over-ambitious—remember the SMART objectives we looked at in January 2011 edition. Get up and running and follow your plan and fine tune things as you go.

LawCloud: Cloud for Lawyers UK