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Cash is King in Recession

08.05.2009

While panic still seems to be dominating opinion in much of the legal press, a number of commentators (this one included) have sought to provide practical recession response advice. In a recent article I wrote for FD Legal magazine, I highlighted a number of points that will be key to successfully managing your firm through the recession:

  • Lawyers can no longer rely on their firms’ inherent profitability, and must learn to forge much stronger relationships with bank managers and other providers of funding.
  • The role of the finance department is now more crucial than ever, to keep the firm on a sound footing, and to convince the bank manager that this is the case.
  • Economics must defeat politics – partners cannot be allowed to derail financial management initiatives, as this could now be terminal for the firm. Management must provide a strong lead.
  • The basis for a sound financial strategy through the recession must be cash flow, cash flow, cash flow.

We are already seeing opportunities arising for well-run, strongly managed law firms as recession inevitably leads to market consolidation. Increasing market share through careful business development planning will be an option, but a swift and effective response requires a strong funding position.

The immediate focus must be on cash flow and the systematic reduction of lock-up. This involves standards being set at a departmental level, and exceptions being identified in order to be eliminated. Responsibility should lie not only with individual fee earners, but also with a nominated partner in each department who will be entrusted with persistent follow-up. This is where the importance of the management board, and the ability to achieve partner buy-in, demonstrates its value. Only then can the firm’s management turn its attention to cost structures, and longer-term profitability.

Cash management has historically been a ‘Cinderella’ function in the legal sector, but strong demand and the barriers to entry to the legal market meant that firms could prosper in spite of this. The market has turned, however. Money is scarce, and banks prefer lending to customers with good financial management and management information, and so these will no longer be optional, while the Legal Services Bill and private equity will step up the pressure next year. 2009’s market therefore requires a fundamentally different approach, recognising the vital role of cash management in ensuring a firm’s survival and prosperity in the changing legal landscape.

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