Paying homage to King Cash
The Word of Gold: for firms to be solid, they must first be liquid
“Turbulence Ahead”, thundered the front cover of last month’s Journal, doing its bit for festive gaiety. It is right. Higher inflation and the uncertainty created by Brexit, exacerbated in Scotland by talk of Indyref2, is likely to slow UK GDP this year. Subdued business and personal activity will make it a testing year for all professional firms. In this environment, having a cash cushion has never been more important.
Yet for many firms, managing cash flow is a Cinderella activity. It has been said before, but bears repeating: balance sheets and accounting statements are all very well, but the only reality is cash. As post-festive credit card bills land with a baleful thud, here are my suggestions to keeping the cash flowing in. One or two may surprise you.
1. When you make a decision to extend credit, you are taking a risk, so think like a lender, not a lawyer. The greater the risk, the greater the need for rigour: pricing appropriately, insisting on payments to account of fees or funding for outlays as they arise, and refreshing them regularly as matters progress. Have no embarrassment about asking. If clients push back on principle against keeping you in funds, you are better off without them.
2. Get a grip. If you cannot see an accurate picture of your firm’s financial position quickly and easily, you may be at serious risk. Good data is everything. The market is full of user-friendly finance software for firms of every size. For small and medium-sized firms especially, it need not be expensive. Not having it is likely to be infinitely more expensive.
3. Do not allow fee-earner discretion on cash collection. In each practice area, put in place policies on extension of credit and collection of cash which may be deviated from without express consent only on pain of death. Doing this not only creates consistency, it makes implementation easier for fee earners if they are able to tell clients: “These are the policies of the firm and I have no option but to follow them.” None of this prevents other arrangements being made in exceptional circumstances, provided there is an effective internal process in place for making the decision.
4. Make the implementation of credit policy by all partners and fee-earners an important part of their appraisal and reward. I have encountered law firms who do not pay partner drawings if a minimum amount of cash has not been collected in the month. Too draconian? Would cause insurrection? The striking feature of firms who adopt such a policy is how seldom they need to invoke it – and the size of the houses their partners live in.
5. Fee-earners should not have prime responsibility for cash collection. They tend not to prioritise it. Often, unconfident of their value, they fear the act of asking clients to cough up will drive them away. Have trained credit control staff work collaboratively with the fee-earners, give them the authority to challenge special pleading, and incentivise them well to be effective.
6. Incentivise clients equally well to pay promptly. For example, for clients who provide work on a project-by-project basis, offer retainer arrangements in exchange for a discount. Making a little less in total will be more than offset by the benefit of cash flowing predictably into the bank. Set terms which incentivise early payment – for example a 2% discount for payment by return, with payment in full in not more than 30 days, and a 2% surcharge for late payment. Arrangements like these are good not only for cash flow, but relationships. Clients appreciate lawyers who are commercial, and willing to give and take for mutual benefit.
7. Factor into every cash flow forecast the need to pay the taxman, and set aside an appropriate sum every month. It is remarkable how many firms do not, and end up scrabbling around for the equivalent of loose change down the back of the sofa, or pleading with their bank, or both.
8. Finally, be as effective a customer as you are a provider. Review your suppliers at least annually, to make sure they are giving you the best possible prices and payment terms. Pay bills on time, but not before time. Be assertive about extracting more value, and/or better terms. There is a balance to be struck between being assertive and being unreasonable, but too often firms lack the beady-eyed focus clients display when it comes to procurement of goods and services.
In spite of the forces of darkness ranged against us, and in the full confidence they will be overcome, I wish you a very happy, healthy and liquid new year.
Stephen Gold was the founder and senior partner of Golds, a multi-award-winning law firm which grew from a sole practice to become a UK leader in its sectors. He is now a consultant, non-exec and trusted adviser to leading firms nationwide and internationally.
e: firstname.lastname@example.org; t: 07968 484232; w: www.stephengold.co.uk; twitter: @thewordofgold