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Financial Management: Cash is king for legal practitioners

Every Issue

Cite as: Jan/Feb 2011 85(1/2) LIJ, p.77

Good cash flow management is a year-round necessity for legal practices.

Legal practitioners need to manage a number of basic business fundamentals to ensure their practice can survive the ups and downs of business and economic cycles. Central to all of the issues is the management of cash flow.

Ensure your house is in order

The first matter to consider is whether the practice is operating as efficiently as possible.

This challenge is about more than just cost efficiency – it is also about self-awareness and honesty.

Partners must all be contributing, in their own ways, to the practice. Winners of work need to maximise their marketing efforts, managers of the practice need to keep a close watch on key indicators such as utilisation, recovery of work in progress and levels of cash reserves, and partners must communicate, be supportive and drive each other to remain positive and succeed.

This also applies to a practitioner’s personal affairs. Make sure personal commitments are known and, where needed, minimised. If necessary, put into place a personal budget, forecast cash flows and discuss your tax position with your financial adviser.

Reliable and timely information

Ensure you are aware of the practice’s current financial position by making sure reliable financial information is prepared and provided for management to assess and review on a timely basis. This includes the traditional profit and loss and balance sheet, together with operating information such as utilisation, and assessment of recovery of work in progress.

When things are tight, weekly reporting of work in progress balances, recent invoicing, cash collections, and other indicators of performance may be required. Importantly, any interim reporting should be concise and simple to obtain from existing systems.

Second, you need to ensure time is devoted to reviewing the information when it is prepared, and acting on it.

Prospective information

The financial information needs to be prospective, as well as historical. All practices should have a three-way forecast of their projected monthly balance sheet, profit and loss and cash flow position integrated within a single model.

This model will assist management to consider the future, and ensure that movements in working capital – such as work in progress, debtors and creditors – are known, and their impact on the cash held, or reserves required, clearly visible.

Importantly, this is not a one-off exercise. Once initial modelling is established, it is important someone is responsible for reviewing this at least on a monthly basis to keep it relevant, and identify and act on any issues identified.

Managing working capital

Within a practice, the immediate cash demands are the money tied up in work in progress, debtors, creditors and ongoing expenses such as wages, pay as you go withholding, superannuation and payroll tax.

The obvious aim is to minimise the investment in work in progress and debtors, while also taking advantage of the opportunities available for funding a business through suppliers.

The management of debtors is best achieved through constant monitoring and communication. Make sure all clients are aware of the credit terms and that these are proactively monitored to ensure payment.

Be mindful not to expose the practice to excessive debts with a single client or industry. Constant monitoring and enforcement of credit limits is important. Seek to have a party outside of the direct client relationship involved in the debtor management, leaving the practitioner to maintain a proactive relationship with clients.

Management of work in progress is also critical. The aim is obviously to convert this asset into cash by way of regular invoicing; largely, this only requires discipline.

Creditors also need to be utilised. While it is important not to abuse supplier relationships, there is often flexibility above and beyond supplier terms, but it is important to keep communicating with them.

Similarly, ensure communication remains open with the tax offices of the federal and state governments.

Make sure reporting occurs as and when required. If extensions of payment terms are required to manage through a particularly tight cash flow period, be proactive. Authorities are normally prepared to work with businesses over a short term.

If you have a payment plan with a supplier, make sure you do not commit to payments you cannot meet.

These practices are relevant at all times for business, but particularly so when times are challenging, including the traditionally quieter Christmas and New Year period.



PETER JOSE is a partner in the business advisory and assurance division of Pitcher Partners (www.pitcher.com.au) and can be contacted at Peter.Jose@pitcher.com.au.

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