As the UK slowly emerges from recession, it is worth considering the impact on cash flow in small and medium sized businesses across the land. As has been acknowledged elsewhere, an upturn can be a dangerous time, putting extra strain on a firm’s cash flow and working capital management.
Our approach is based on the premise that the value-adding process in a law firm can be seen as a pipeline – instructions enter the pipeline, and cash emerges at the end. This is often in stark contrast to the approach that many professionals take – that the only important step is the ‘technical’ bit in the middle.
Just as the pipeline should be constantly being filled with instructions, it is vital to ensure that all of the value created is actually developed, captured and billed, or significant losses will arise. In some senses, the effect of missing these steps, or doing them badly, is even worse than not bringing in the work in the first place - because all of the time and resources consumed in actually doing the work are wasted, as the cash doesn't come through as a reward.
Starting at the End
When it comes to improving cash flow, the key is to start at the end of the pipeline and work back. There are two major benefits to taking this approach. In the first instance, by ‘flushing out’ cash that you have already billed but not collected, and billing overdue WIP, you will create an immediate effect on your cash situation.
Secondly, by measuring each stage in the pipeline process, you can quite accurately gauge how long matters should take from beginning through to collection for each department, and thus provide fairly accurate cash flow forecasts (for your own management and for the bank manager!).
Prospering through the Upturn
Effective pipeline management is important for businesses of all sizes, but it has a particularly noticeable impact for smaller firms. Getting a firm hold on the billing and collection process, and ‘flushing’ cash through the pipeline, will help firms stay on a stable footing through a tough recovery. This will potentially create growth and acquisition opportunities – and will give lenders the confidence to back the winners in the new economy.