Published Tuesday 2nd June 2020
As with many companies, cash flow is one of the biggest contributors when looking at business failure. For law firms in particular, the nature of their work and the partnership model under which they operate, heightens the challenge further. This, coupled with the Coronavirus pandemic and the economic consequences it continues to bring, means law firm revenues are feeling the squeeze – tighter than they might have once been prepared for.
In a recent article, The Law Society Gazette explored some of the most challenging issues facing law firms with input from key experts on how firms should prioritise their actions specifically in relation to cash flow and anyone facing a liquidity crisis. One such action reflected the importance of re-examining expenditure based on insights from our Professional Services Specialist Jason Adderley.
Another perhaps obvious but crucial action is financial management prioritisation. Law firms should free up funds to survive in the short-term without damaging the long-term balance sheet, all the while maintaining trusted client relationships. Alternatively, The Acid Test is another quick and easy way to assess a company’s liquidity – this is calculated by dividing liquid assets by total liabilities. The higher the ratio, the greater the liquidity.
Other suggestions include devising a strategic approach to reducing work-in-progress levels. This ultimately ensures a steady cash flow and avoids scenarios such as force majeure, contract termination and other back-stop positions. Whilst this approach predominately focuses on the client, firms should also look at financial distributions made to their partners. The Law Society Gazette reports some firms reducing their partner drawings by 25%, demonstrating that whilst partners should expect to benefit in good times, they should have lower expectations in times of uncertainty and downfall.
Our Professional Services Specialist Jason Adderley here at Expense Reduction Analysts, offers a holistic position and encourages law firms to re-examine their regular outgoings across the entire business. He notes that many contracts automatically renew and thus slip under the cost saving radar. For example, with many law firms adapting to remote working, is your demand for printers the same? Do you need to renew your reprographics contract? Similarly, as the professional services industry is one that continues to run effectively whilst workers operate from home, will you continue to require as much office space? Once a traditional fixed cost, office space could soon become a significant reduced cost.
There are many approaches to maintaining cash flow and as we collectively ride the turbulent wave that is Coronavirus, it is now more important than ever to be prepared for any further uncertainty. This may include a shift in the regulatory landscape, the rise of new ‘deals’ or preparing for the recovery phase. At Expense Reduction Analysts, we have dedicated Professional Services Specialists who can support your business along the challenging road ahead, particularly in terms of strengthening cash flow and improving internal efficiencies. Get in touch with us today to learn more.