Get free updates - subscribe to our monthly newsletter Subscribe
Every law firm, indeed every business, goes through phases dependent upon the economy, its clients, its staff and its partners. On occasions the firm will face challenges which need to be addressed in order to ensure that future success (or even survival) of the firm. This article focuses on the shorter term issues of timing, cash management, forecasting and understanding the strategic position.
In each situation the key questions are:
Restructuring is more than just the routine management of your practice. It is about a need for significant change – be it structure, personnel, clients, work types, offices or funding. If you need your practice restructuring, the key financial signs are likely to be:
Businesses can survive for many years without making a profit – but without cash, trading will have to cease very rapidly. So the first key step for a firm with challenges is to check the short term cash flow position.
Use can be made of a 13 week cashflow model. Included within the forecasts should be very realistic inflow assumptions and very pessimistic outflow assumptions. Once prepared consideration must then be given to including a contingency expense provision in addition – any restructure is likely to generate an unexpected cost, or maybe advance a cost that would normally be expected following the end of the forecast period.
With the 13 week forecast in hand the results can be compared to the funding resources available – be they overdraft, invoice finance, term loan or partner capital. This forecast should be updated and extended on a weekly basis, to ensure that the actual performance of the business (by comparison to the forecast) is accurate and that any pinch points can be identified early.
The importance of creating and extending (on a weekly basis) the 13 week cashflow is explained above. However this is not the only forecast likely to be required – a three year forecast is also likely to be necessary.
The aim of this forecast is to communicate to partners and then funders the position of the business now and where it expects to go over the next 36 months. In the course of drafting, adjustments to the forecasts may be required for early strategic decisions made in parallel with the forecasting process.
When the forecast is ready for presentation to partners and, subsequently funders, consider the following final checks:
Any funder will expect all partners to be in agreement with any forecasts presented, especially if seeking an increase in facility. So ensuring proper partnership understanding of the position and buy-in to the strategy is key.
With the short term cash position under active management the firm’s management board can focus on where it is strategically. Each review will be different, but key questions will be:
Overall you need to understand where you are now – and you need to have a very realistic view of that reality. There is no point in overstating your position as you will have to justify your position to others as the restructuring process continues, and they will challenge you if they believe that your stated current position is a fantasy. With your understanding of where you are currently you can also focus on where you want to get to. It is the business owner’s decision as to where they wish the business to go, usually the equity partners in a legal context.
In this article we have considered when you should restructure your legal business, and the short term cashflow issues that will inevitably result. Every restructuring is different, and every one will create challenges, so remember:
If you like this article and would like our FREE updates sent straight to your inbox then subscribe to our monthly newsletterSubscribe
All content © 2015 Armstrong Watson. All Rights Reserved. Website by Simon Pighills.
Armstrong Watson LLP is a limited liability partnership registered in England and Wales, number OC415608. The registered office is 15 Victoria Place, Carlisle, CA1 1EW where a list of members is kept. Armstrong Watson Accountants, Business & Financial Advisers is a trading style of Armstrong Watson LLP. Armstrong Watson LLP is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities.
Armstrong Watson Audit Limited is registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Registered as a limited company in England and Wales No. 8800970. Registered office: 15 Victoria Place, Carlisle, CA1 1EW
Armstrong Watson Financial Planning Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 542122. Registered as a limited company in England and Wales No. 7208672. Armstrong Watson Financial Planning & Wealth Management is a trading name of Armstrong Watson Financial Planning Limited. Registered Office: 15 Victoria Place, Carlisle, CA1 1EW