Forecasting Cash Outflows

Cash flow forecasts fall into two parts-inflows and outflows. Except in situations where the fee earners are remunerated on an Eat What You Kill basis, the inflows and outflows are subject to separate influences, so they can be forecasted independently. 

To a large extent the cash outflows are fixed-either in value or timing or both. Most payments follow a predictable cycle;

  • Daily
  • Weekly
  • Monthly
  • Quarterly 
  • Annually

For example 

  • Payroll and associated costs are monthly 
  • VAT is paid quarterly 
  • Partner taxation is paid half yearly 
  • Bonuses may be paid annually 

It is important to understand that working through the expenses part of the profit and loss account will miss many of the significant payments. For example, VAT does not appear in the profit and loss account, loan repayments and financing are balance sheet transactions. 

We have found over the years that most payments will fall under one of three headings 

Fixed in time & value

These are normally direct debits or standing orders. It’s important to identify these because unless something is done to make a change, the money will leave our bank account. Many of these are also very difficult to negotiate variation to. In the profit and loss account these will include items such as rent, rates, insurance, IT contracts and library subscriptions. 

Fixed time payments

These are subject to variation but largely predictable. These include payroll – salary and at a different time PAYE and national insurance contributions, VAT (predictable based on turnover) and business taxation (predictable based on profits). All of these have clear due dates and the broad scale of the expenditure will be known even if the exact detail is not. For example, the normal value of the payroll will be subject to variation for overtime or bonus payments or sickness. 

Disbursements

have to be paid in accordance with the Solicitors Accounts Rules. They are not predictable but, in most circumstances, they are only payable once the cash is received as part of the inflows. 

 Taken together these three categories of expenditure normally account for well over 90% of the firm’s outgoings. 

In most circumstances it is then possible to do a contingency allowance for the other sundry expenditure.  

In the first instance this should give a sufficient level of accuracy to allow a useful forecast to be prepared. 

If the situation is more difficult, more precision will be needed in estimating the values to ensure that there is sufficient headroom or that the early warning is used to generate evasive action 

 In cash flow forecasting-it should always be easier to estimate the outflows in the inflows 

Forecasting inflows (short-term)

Forecasting (and then delivering) cash flows is crucial to any business. Otherwise they die. I have outlined how to approach the much easier task of forecasting outflows-but how can we make credible forecasts about inflows in such an uncertain time? We use different approaches dependent on the time. Being forecasted. In this post I will concentrate on the short-term say up to 3 months.

For several years we have used a five-step pipeline to model law firm Finance-

  • Get client
  • Get share of work
  • Do work
  • Bill work
  • Collect fees

Each department has its own version and its own characteristics.

But we start from the premise that most collections in a 13-week timeframe will come from files which currently exist.

Firstly, we should collect the existing outstanding debtors-unless we have reason to believe otherwise. Secondly, we need to forecast the next three months billing (by department) and then identify which of that will NOT be paid in that timeframe-i.e. they will still be debtors at the end of the three-month forecasting period.

Everything else must be collected.

The billing forecast can be done in two ways. For high volume low value type work (e.g. Residential Conveyancing, Personal Injury portal, Settlement Agreements etc.) we can look at the number of transactions multiplied by the average value.

For high value work we need to use the Pareto 80/20 principle and firstly concentrate our attention on the key cases which will provide 80% of the turnover. These are especially important for sensitivity testing. One big case can make the difference between comfort and doom.

The one sure thing is that a forecast of the future will be wrong-but if we have a logical forecast with clear assumptions based largely on work that we already know we have, we have a sound base to work from.

We can then also see where we should put our attention and pressure, how much leeway we have and, if need be, we can prepare contingency plans.

Steps in Sync

The current crisis is having a very different effect across the sector.

But so far many of the firms that I speak to are having far less of a problem than they had expected only a few weeks ago. Most firms are telling me that that their billing is holding up reasonably well. Since the lockdown started in late March the cash flow has been reasonably strong and has been helped by the CJRS Furlough refunds.

But when I’ve probed into the data about new work and about value creation the picture is far more mixed and generally less optimistic.

It has long been the case that law firm’s primary short-term measurement is their billing level. Unfortunately, excessive focus on this obscures some underlying issues

Firms need to hit their billing targets, and even more importantly collect in the relevant cash!

But it is just as important that they open at least as much value of files as they bill in any given month. Of course, many firms don’t bother to identify the value of the files that they open in any given month, so we have to use the numbers of files opened as a proxy. But it remains the case that unless you open at least the same value of work as you complete, your business will decline. In effect you will be selling the family silver-or as we prefer to describe it you will be draining the tank.

A third thing that we have to do in order to ensure our business is in sync is to understand and measure the amount of value that we are creating in each month. It still surprises me after many years just how few firms carefully monitor work in progress creation and movement.

Unless you open matters on which to do the work, and then create value by doing the work, you have nothing to sell, and therefore the billing will not follow.

We know that many fee earners much prefer doing the work (chargeable time) to going out and winning it-we also know that What Gets Managed Gets Better. So, for many firms it is relatively easy to monitor the amount of chargeable hours that their fee earners are doing even when working from home- it is much harder to assess the business development work that they’re doing. Therefore, any fee earner who wants to look good can keep their billing levels high by keeping their Chargeable Hours high and Neglecting to bring in tomorrow’s work.

By not keeping matters opened, value creation and billing in sync our fee earners may just be sowing the seeds of future decline.

It’s much harder to fill the tank up again than it is to drain it

Sanity, Vanity, Reality

Whenever I start a finance workshop with Partners, especially Managing Partners I ask the delegates what their most pressing issues are.

Invariably the most common concern is cash flow. Thriving growing firms can find it difficult to fund their growth whilst the less successful find it hard to cover their costs.

Why is this always so pressing?

At its simplest law firms focus on a single measure -profitability. All the public comparisons and most internal documents focus on profitability. Reliance on a single metric is like a one-legged stool. However large and strong, it is liable to fall over!

Accountants use three measures to monitor business health – Profit, Balance sheet and Cash flow.

As the American writer Ed Reeser said a few years ago “Every major American law firm which has gone under in recent years had plenty of profit until the day it died – it is a lack of cash which kills law firms – not lack of profit “.

And yet, few law firms give any prominence in their management information to cash flow analysis, and the forward-looking cash projections. Too much attention is focused on profit not enough on cash flow.

After all there is much truth in the old saying “Turnover is vanity, Profit is Sanity, Cash is Reality “.

Becoming a Recognised Rainmaker

‘It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so’.

The Oscar-winning 2015 film “The Big Short”

In this is article Bob Spence and Barry Wilkinson will focus you on using your existing people skills to become one of your sectors recognised Rainmakers.

https://www.dictionary.com/browse/rainmaker

Looing Forward

Our opening statement was attributed to Mark Twain who was clearly ahead of his time as many of his quotes are relevant to Rainmaking. According to our data-to-results experiences, covering the last 27 years, there are recognisable trends that are strategic errors in business development.

All you need in this life is ignorance and confidence and then success is sure

Mark Twain

The first one error is this. It is vital to be able to identify and describe with immense clarity the people that should form part of your Rainmaking network. Very few people can do this.

So, our first key question is what type of network should you be building?

Can you answer that question accurately?

It is worth a reflection, so be honest with yourself.

Network

Can you describe your ideal network of connections in detail? Can you explain to your peers and colleagues why you would need this type of network to succeed as a Rainmaker?

Due to the urgency and pressures that Rainmakers are facing our network algorithm research looked at the popular myths and misconceptions that all lawyers are surrounded with. Many of these myths are constantly being reinforced. Our findings explored why we should question them.

Aleksandra Gora, CEO of Rainmaker PRO software with Professor T. Turowski

Think of the amount of time that is spent on crafting the professional ritual that is the ‘business-card-exchange’. Whether you refer to it as the ‘elevator-pitch’ or ’60-second-introduction’ or whether you deliver this business-card-exchange informally within mixer events or formally within the context of a ‘speed-event’ you are essentially an ‘aspirin looking for a headache’?

It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt

Mark Twain

Why is this process given so much credibility? There are best-selling books, well known speakers, training programmes delivered at a high premium and webinars that embed this process as a ‘must-have-skill’ into the successful Rainmaker.

Why would this process have the ability to create the right Rainmaking connections?

It is actually very difficult to apply science to your network of Rainmaking connections.

Question Mark

This would be to provide an accurate understanding of how you are hitting your revenue figures. Is it because of your network or in spite your network?

Get your facts first and then you can distort them as you please

Mark Twain

However, this need not be so. All of us working at developing our practice on a day to day basis wrestle with two conflicting trains of thought.

The first is that it makes sense that generating outstanding commercial results as a lawyer requires a lean, well-managed, well thought-out, strategic networking plan. You have only so many hours in the day, and there is no time to waste effort networking and deliver your Rainmaking in the wrong areas.

This train of thought competes with the second which is that that this activity is essentially a “numbers game.” If you want to win the lottery, you have to buy a ticket.

The second thought generally overrides the first. There is so much more positive noise around this argument. Many lawyers adopt a set of actions enabling them to create minimal professional connectivity to the largest number of people possible. This second approach is reinforced continually by measuring the activity around investing time into developing new relationships. This can be on-line and off-line.

Let us make a special effort to stop communicating with each other so that we can have some conversation.

Mark Twain

This is the ongoing consideration of quantity versus quality in an approach to hitting our client acquisition targets. You have to make strategic decisions in terms of what works for you in the context of your time and what you offer professionally. These articles in 2020 will help you make those choices.

Networking

Keep in mind that a maximum of 3°of separation is the introduction threshold to improving your network development. Our extensive use of algorithms showed these powerful results:

Someone who knows you well and is able to introduce you to someone that they know well is communicating your value within 1° of separation. The likelihood that an introduction could happen through a well-positioned request is a maximum of 82%.

Someone who knows you well and knows another party really well being able to influence that second party to introduce you to another party is communicating your value within 2° of separation. The likelihood that an introduction could happen through a well-positioned request is a maximum of 17%.

If we push this formula to add another chain to it which means communicating your value within 3° of separation through a well-positioned request has a maximum likelihood of 0.8%.

As your time is money these are actually financial odds so why would you even consider anything beyond 1° of separation? (A random business-card-exchange is not even in this measurement system).

You are in a casino and investing time. What odds would you play to?

Playing the Odds

I doubt if many of us would bet against James Bond but in reality, you are if you ignore the 3° of separation thinking. Our extensive use of algorithms asks:

Does this new connection have the likelihood to be an improvement on who you already know, and are they within 3°or less of a meaningful introduction?

Is this new person already within a chain of three introductions to you? Is there someone in the room that can vouch that you are a person worth knowing? (That is 1°of separation). Is that person able to follow through for you? If not, then apart from professional courtesy requirements, will they really form part of your strategic network on the basis of your ‘business-card-exchange’.

This approach may be at odds that only the fees earned should be measured. This is a view that Rainmaking effort on a week to week basis is irrelevant unless it scores generates fees/wins clients. Networking management is also Rainmaking effort and is the key to ensuring that you are continually 1°of separation from a fee earning introduction.

There are lies, damned lies and statistics.

Mark Twain

Our thinking based on analysing networking results thoroughly is that you must manage your connections ruthlessly and to the highest standard possible to differentiate yourselves from the competition in terms of networking behaviour. Every new connection has to survive the 3° of separation benchmark. If it does so, when you need to manage only the connections that fit within this framework.

We still, of course, have the same number of client hours per week to work with as we did twenty-five years ago; at the same time, the client can access our online presence 24/7.

Finally, as business development professionals we are constantly being challenged with the concept of “return on engagement” against the Rainmaking actions we take. So how do we measure this consistently apart from immediate revenue returns?

As an overview, here are some of the vital questions we will help you understand in our 2020 articles:

1) Why can the returns on business development networking deteriorate?

2) What are the major networking pitfalls we must avoid?

3) What are the skills we need to avoid the reduction of return of effort?

4) How do we pick out the most appropriate people to connect and network with?

5) What information do we need to build our network?

6) What are the current best practices in business development behaviour?

7) What are the best methods of implementing a networking plan?

8) Why is 3°of separation of separation the only benchmark in a strong strategy?