The Coronavirus pandemic has created the need for many law firms to adapt quickly, taking lots of management time and causing stress to those in the sector as well as in the wider community. That said, most law firms would have bitten your hand off for the results that have actually been achieved, if it had been offered to them back in March 2020.
Most law firms have had a slight overall reduction in fee income, but improved profits and improved cash flows. In fact, the cash held by many law firms right now is higher than it has been for a long time, if not ever.
The improved profits and cash have been created on the back of a boom in the property market; reduced office, printing, postage, travel and marketing expenses; and increased support in the form of furlough, loans and deferral of taxes.
Many of those boosts are short-term. The property boom is mostly on the back of pent up demand; lifestyle changes decided as a result of the pandemic and the stamp duty exemption window to 31 March 2021. There is a possibility that the stamp duty exemption may be extended, although regardless of that, at some point each of these time-limited boosts will stop. That is likely to happen around the same time that government support measures will cease and funds need to begin to be repaid.
The wider UK economy may also feel pressure as those support mechanisms are withdrawn, and so that with all of the sector specific aspects is likely to mean that it will become more difficult for law firms from April 2021 onwards.
Now is the time to start planning for that. When people are busy in the ‘good’ times, it is easy to fall into bad habits of not operating as effectively as they could do. It is not easy to fall out of those bad habits when times become tougher. Cash will become tighter and habits are what good cashflow is all about. Firms that get into the habits now of good housekeeping, client, WIP and debtor management will benefit in the potentially harder times to come.
Firms should look to get themselves into as strong a position as possible now for what might be choppy waters ahead. More detail on the steps to take for those good habits can be found in the Law Society’s Financial Stability Toolkit, which applies equally well to strong performing firms as weaker ones. The steps to take a good law firm and make it even stronger are the same steps that are taken in turning around a weaker firm, but without as much pressure to do so.
Download the Financial Stability Toolkit
If your business is feeling the impact of reduced cashflow, this can manifest itself in a number of ways, including HMRC arrears, an inability to meet creditor payments as they fall due and rent arrears. Many firms may have taken advantage of the ability to defer VAT until 31 March 2021 and commercial rents for offices may not have been paid, therefore demonstrating potential distress within the business.
Whilst creditors are unable to issue statutory demands or winding up petitions at present, and landlords are unable to enforce their rights under their leases, these warning signs might not be at the top of your priority list. However, those deferred payments will still fall due in the not too distant future. Understanding what those repayments are likely to look like will help you to determine a more accurate cash position as we navigate out of the lockdown.
Where there is a cash need, firms often turn to their lender or provider of working capital for support. This could be in the shape of requesting an increase in borrowing facilities with your bank or considering additional short term borrowing to see you through a tight patch. These might assist in the short term, however repayment terms can cause additional stress on already stressed cashflow. If you are concerned about a lack of cash, it is often worthwhile seeking advice before you enter into additional obligations to ensure that any decision you are taking is completely informed.
If the challenges around the Pandemic are not enough, we are living in litigious times, and PI cover is becoming a costly necessity for law practices, which will surely see further consolidation in the sector in the coming years. Armstrong Watson has a proven track record in facilitating law firm disposals/acquisitions.
If it comes to the worst and you do need to close your firm, an all encompassing review of the best way of closure is required. That may include the positions of the individual owners as well as the position of the business and may include the options of various formal insolvency routes. Advice from an Insolvency Practitioner with experience in the legal sector is vital at that point, as there are certain restrictions that you would need to be aware of.
The Financial Stability Toolkit includes some top tips on how to deal with restructuring and also the available insolvency options. At Armstrong Watson, we have an experienced legal sector team, which is evidenced by the fact that Armstrong Watson was chosen by the Law Society to write the Toolkit.
Should any of the above points resonate with you and your firm, you should start to consider what other actions you need to take in order to fulfil your obligations and understand the options available to the practice. Those should include your obligations in respect of the SRA together with your duties as owner/managers of a potentially insolvent business.