How many days
until you run
out of cash?
When I became an Equity Partner in and Managing Partner of Darbys in 2007, in what was a large firm of 150 people and an annual turnover of some £6m, the firm didn’t even do cash-flow forecasts. That’s how things were, then.
Now, daily cash income is one KPI that most Managing Partners wait for and watch. An indicator that makes Managing Partners and FD’s shudder is “if no more cash came in, how many days before we run out of cash?” (Do you know your number?)
There are a great many areas to be looked at which affect the “cash coming in today” number. You can increase this number by hitting recalcitrant debtors with a bigger stick. Or you can go back a number of stages and take action in some fundamental areas that will have a wholesale and sustainable impact upon the revenues you generate, and the cash you receive.
In all of these stages, I have wrestled for years with challenges and resolutions, securing success and failure. I have closely observed other firms and what they got right and wrong. Against that background, I can work with you to look at all or any of these parts to help you to make improvements.
It is only with cash that you can look after your people
Increase your Gross Profit
Right now, the legal market is very buoyant and salaries are high. That squeezes gross margins. Traditional partner and solicitor routes to growth are therefore very expensive – and are painful in cash terms if the work is long-tailed. I have seen though within my firm and in other firms how that model or other models can be used to grow a firm and to grow profit. Real efficiencies can be secured in terms of fee and cash generation and in margin terms. Included in the areas to look at here are :
• Pricing, and the under-pricing of work in order to win the work. [This is often a function of concentrating on getting new clients instead of wringing a lifetime’s value out of your existing clients]
• Structural issues – getting the right lawyer to do the right job (or part of a job) at the right price
• Time capture – lawyers not recording all time spent on a file
• Not documenting time spent on a file, so the client or other side can challenge it
• Discounting even the recorded time when it comes to billing the file
• Billing too infrequently
• Not having defined precisely in the retainer the work to be done for the initial price
• Not changing the price when the work changes part-way through
• Not getting money on account
• Failing to capture all disbursements when it comes to billing the file
• Not sending the bill out straight away
• All too readily agreeing a discount to the billed amount if any complaint is raised.
• Allowing far too much time to pay the bill, or agreeing slow instalment arrangements
Real progress can be made in all of these areas that brings the right growth to your business without you needing an additional client or even case.
I spent a lot of time working with an FD and an Operations Director looking at where we could save money on overheads. Real progress is possible in a host of areas where cheaper but effective options are available and where it is possible to smoothly incorporate the ensuing changes into your business.
As with “daily cash” though, what you have to pay on an overhead can be heavily influenced by other areas of your business.
Professional Indemnity Insurance is an example. This costs you not just in terms of premiums each year, but also in terms of excesses you have to pay out. Having strong risk-management in your legal teams can therefore not only result in keeping clients happy, it can also lead to reduced premiums at renewal and to less cash being paid out during the course of the year.
It really is all about cash. It is only with cash that you can look after your people, and it is only with cash that you are totally free to make the investment decisions that your business needs.
I saw that cash can be tough during hard times. We went into the 2007 credit-crunch in a weak position. It was a masterclass though in giving us no choice but to turn the business around at high speed, in a cash-based way.
More painful even than that though were our years of high speed growth (Darbys grew by 35% two years in a row), even with the total support of our bank.
Growth in a law firm ties up an awful lot of cash. A handful of new lawyers costs a fortune, let alone dozens of them. Growing some areas of work may require you to fund lawyers for longer, or to fund large levels of disbursements. Growth in long-tailed work should be balanced by growth in “faster” areas of work.
At such times of growth, any extraordinary or additional draw on your cash can cause a squeeze – pay increases for your people, increased support staff, departing equity partners, new buildings, new IT, PII excesses having to be paid out, etc.
An incredible exercise I introduced was to look at the cash impact over the months of each of 20 or so teams (taking into account absolutely every cash-related item). I say “incredible” as the picture this reveals can bely all views on how busy or successful a team is – only its cash impact matters. Without an understanding of a team’s true cash impact, decisions made about that team can be inappropriate.
Most law firms have all the money they need – it’s just that the clients haven’t handed it over yet. A firm absolutely needs to get debtor days down. In firms, including my own, I have seen a spectrum of abilities here – from dangerously lax, to firms with a credit control policy but where in fact the firm has one hand tied behind its back because the client partner won’t let their clients be sacked or sued, through to firms where cash is at the heart of their operation and lateness in payment won’t be tolerated.
A way ahead
I relish the prospect of working with a firm to look at how they fare in any or all of these areas, either across the firm or in particular teams. By adding my experience and fresh eyes to your experience and knowledge of your business, real change for the better is possible by developing team strategies and priorities, and by harnessing and directing the energies of your people.