We have been suggesting for some time that the banks will only become more stringent in their lending criteria. This has been consistently supported by bankers working within the sector who have made the point that law firms must clearly be strong and have viable lending propositions, and that well-managed firms will continue to be supported by their lenders.
Managing the Bank
This point was underlined by Chris Marston, Head of Professional Practices at Lloyds TSB Commercial, at the recent 360 Legal Group Conference. Chris argued that banks, out of necessity, are going to be more insistent on having access to accurate financial information from their law firm clients. For more on the communication side of the relationship, please see Law Firm Profitability and the Banking Relationship.
The days of firms keeping their cards close to their chest are long gone. Full disclosure, not just of the current state of financial affairs (WIP and debtors), but of the firms prospects including, crucially, future sources of work are an important part of the management jigsaw.
A Coherent Approach to Law Firm Management
Managing a law firm is no longer a question of reconciling, as best as possible, the interests of different fiefs and chasing non-compliance in matters of billing and collection. Management and management information must be coherent and forward-looking. There is no clear-cut distinction between enforcing targets for billable hours, collection of monies owed, and monitoring new clients and instructions.
The figures for debtors relate to the past, and as they get older they become harder to collect. Work in Progress refers to the current workload and, unless it is turned into cash, simply represents a series of numbers on a page. The number of files opened each month gives an indication of incoming workload and the type of work.
Forecasting the Future
However, in many cases this will not be enough for the bank to support. The important thing is to bring this all together and to use past billing figures to accurately predict the value of work coming in. This, in combination with realistic estimates of the cash to be brought in from existing WIP and debtors and when this will be realised, should provide the basis for sound cash-flow forecasts. Of course, forecasts will never prove to be 100% accurate, but forecasts of this nature will be far more valuable to the firm and the bank alike than a series of figures relating solely to the past.
This is the future-focused approach that banks now require from their law firm clients. To those who have worked in other sectors, and particularly those with financial management credentials, this may not seem like anything new. But for many law firms, this represents a fundamentally different approach and it is crucial to the ongoing prosperity of law firms across the UK.