Why Good Financial Hygiene is Critical for the Well Being of your Law Firm

Businesses fail for various reasons, and law firms are no exception. Research indicates that in any given year, 85% of small businesses experience financial difficulties, and half of all businesses have cash reserves that would last for less than two weeks.

So, what steps should law firm leaders take to improve the financial hygiene of their firms?

1. Cash Remains King

Understanding your future cash flow should be a priority for any business that aims to succeed. Not only will it help you comprehend the direction of your business, but it will also aid in preparing for its future and making informed business decisions.

Cash flow forecasts should be prepared promptly, based on a rolling 13-week cycle. The relatively short timeframe will allow for a high degree of certainty regarding likely income and expenditure. The cash flow forecast should be updated weekly. Management should review the forecast and take action on any areas that require attention. For those firms fortunate enough to have surplus cash, consider placing it in a separate bank account with a higher interest rate. This move will not only generate income for the firm but also focus partners’ attention on good cash management practices due to the reduced balance in the office account.

2. Client Management

Collecting money on account of costs from clients throughout the life cycle of a matter should be the established culture within the firm.

Prompt payment of bills should be expected from the clients, supported by a robust credit control procedure in cases of payment delays. A skilled credit controller is worth their weight in gold.

Review your client base and consider declining work that was previously marginally profitable and may now result in losses.

Review your pricing policy and assess whether there is room to increase charging rates. Conducting a mystery shopping exercise to understand your competitors’ fees can often prove worthwhile.

3. Performance Manage Your Lawyers

Each lawyer should be assigned a monthly target in terms of chargeable time, and their performance against this target should be reviewed with the lawyer’s manager in a monthly one-on-one meeting.

Targets should be realistic and challenging yet achievable. In many cases, lawyers with no additional management responsibilities record too few chargeable hours, which is unsustainable.

Managers need to delve into the reasons behind lawyers recording low levels of chargeable time and eliminate any barriers. For instance, is there a time recording training issue? Does the lawyer have enough work to achieve the target? Is the IT system inefficient and hampering productivity? Is the lawyer dedicating excessive time to non-chargeable administrative work due to a lack of assistance? The ultimate goal should be to capture more chargeable time.

4. Review Your Expenditure

Regularly reviewing all expenditure items in the profit and loss statement is essential. The three largest expenditure items in a law firm’s budget are staff costs, professional indemnity insurance, and office rent.

• Staff Costs: Evaluate the profitability of each team within your firm based on its gross profit percentage. Is everyone fully utilized? Are you overstaffed? Tough decisions may be necessary. Refrain from recruiting more staff unless there’s a clear business rationale that will enhance profitability in the medium term.
• PII Costs: Utilize law firm financial benchmarking surveys to gauge your PII premium against industry standards. In 2022, the median quartile for PII premium expenditure as a percentage of fee income for participating firms was 3.8%. How does your firm compare? Use the findings to negotiate a better deal with your PI insurers.
• Office Space: Reevaluate the amount of space required in the post-Covid-19 era of hybrid working. Do you have surplus space that you’re paying for but don’t need? It might be time to negotiate with your landlord or consider subletting.

If you’d like to discuss improving financial performance at your law firm, please contact me at ih@hopkinslegalconsulting.co.uk or give me a call on 0791 666 9095. I would be delighted to have a free, no-obligation, and of course, confidential discussion.