Law firms need better financial visibility to maintain healthy cash flow


Law firms, like many businesses, continue to take measures to manage their cash flow, a key component of liquidity, at this time. The impact of the global pandemic has no doubt added pressure to this ongoing daily challenge. From restrictions on partner drawings, delaying supplier payments, furloughing staff, or introducing four-day working weeks, firms are varied in their approach.

The differentiating factor in choosing which of these methods is needed, comes down to how cash rich firms are right now, and the forecasted availability of funds in the short-medium term. Another influencing factor will be their client verticals, and the extent to which they are being affected, but cash balance will ultimately be the decider.

The good news

As we all wait to see what the full economic fallout is from the crisis, the good news is that many industry leaders are optimistic of the overall impact on law firms – citing the demand for legal advice as high and in contrast to the 2008 downturn  - albeit, highly dependent on the type of legal advice firms are delivering and their client base.

In a recent article, the former managing partner of Andersen Legal and Clifford Chance, Tony Williams, spoke of the legal sector being ‘significantly better off than other parts of the economy’, and of lawyers being able to work from home ‘reasonably well’. Although he does point out that US firms may still be hit with the calendar year-end vs. the UK year-end that has just happened, meaning the UK firms should be less short of cash.

Realising cash

Aside from year-end collections, what other proactive measures can firms prioritise to keep cash flow as healthy as it can be? Going back to basics and assessing some of the fundamental processes that lead to cash in the bank is a good place to start. After all, it is only one of the final elements in a ‘cradle-to-grave’ financial engagement model for a legal transaction.

Firms should look at all measures to shorten the work to cash cycle – focusing on collections every month, and not just a big year-end push. Likewise, those firms with an accrual model need to look at shortening the gap between work delivered and billed. In both models the goal is to hasten both the delivery of the invoice and their payment.

A holistic view of the entire firms working capital is needed, a view that must be backed by accurate high-level data that can then be drilled in to with the correct metrics to focus on cash flow and profitability. E.g what would be the impact of widespread extended payment terms? Which market sectors does it make sense to prioritise? Which departments are likely to be able to make the most contribution?

To survive the current climate, also having a very clear strategic plan on where to prioritise efforts, be it on WIP, Debt, or a likely combination of the two, will be key.

The full process

Issuing bills promptly, to allow swift cash realisation is undoubtedly important – but it is also intrinsically linked to continuing to win business, lawyer utilisation, effective time recording and then tight cost management – the full process, not single measures.

Clients had already been increasingly demanding more transparency of costs, and that is likely to intensify. We have always been strong advocates of enabling law firm management teams to be ‘driven-by-data’, and so too, unsurprisingly, are law firm clients.

You cannot control what you cannot see

In our recent Global Cash Flow Survey, we found an interesting number of lawyers and finance teams globally lacked access to timely financial information. In the UK, we found that just 52% of CFOs have access to real-time WIP data, and just a fifth of Partners could readily view this essential information. Likewise, in the US just 9% of all respondents had access to real time data for WIP and 21% are using data up to three days old.

The question of how law firms can improve working capital, and increase liquidity – without accurate, real-time insight to the current state-of-play is even more crucial now. Having visibility of key WIP and Debt data is surely the first step to ensuring the longevity of healthy cash flow at this time.

Quick response

In response to our clients contacting us to help them, we have developed an easy to deploy Working Capital Edition of our flagship financial BI Solution - BigHand Business Intelligence. We are making this available to assist law firm financial leaders get access to core working capital data. The firm-wide dashboards highlight the most important WIP and Debt metrics for better financial visibility to support business decision making.

To find out more about this new solution and how BigHand can get you up and running in a matter of days, visit: Business Intelligence Working Capital Edition