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How can legal firms manage cash flow?

How can legal firms manage cash flow?

Tuesday, 14 April 2020

This is widely regarded as a Chinese saying: “May he live in interesting times.” Well we certainly are doing that during this COVID-19 crisis. Business viability may seem secondary to keeping all your team fit and well, but really must operate in tandem.

Showing my age, I yearn for a reprint of a Law Society pamphlet called “The Expense of Time.” The basic format of salaries, direct costs, indirect costs and profit is a great financial model for a solicitors practice. However, if this is set up in a spreadsheet, you can perform simple variance calculations that enable you to see where profit and cash flow pinch points occur as you change the assumptions.

This is a vital exercise for legal firms as cash flow should hold up in the short term if you defer paying your VAT or income tax (in accordance with the government scheme), but you need to know what sort of problem this may store up for the future and how long you may need to take any loans out for. We know the banks have made loans available to professional firms already, but you still need a good business case that demonstrates how you can afford to repay it.

This can then help determine the number of people you may need to furlough, place on reduced hours or indeed make redundant. We all work hard to build our teams so we want to try to avoid big life-changing decisions (as far as possible), for what we all hope will be a short-term blip.

In looking at the short-term future, we’re all in the dark about the demand for our services, but carrying out a cash flow forecast by income stream will enable you to react as the situation changes, which is the one certain thing to happen. This should help you to work out the critical decisions, and it’s always better to sort finance out in advance than wait for it to become a crisis. This doesn’t need to be a big document, but something you will refer to and update.

Of course, we’re happy to guide you through the cash flow process and offer any support you need. Call 0330 024 0888 or email enquiry@larking-gowen.co.uk. You can also find contact details on the Our People section of our website.

Jon Woolston

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