Why many firms are likely facing a financial pinch point – and how to mitigate it

The last year has taught firms many harsh finance lessons, especially around cash flows. Trevor Hall, finance director at Gardner Leader, explains the ways firms can take those lessons forwards while also avoiding a post-pandemic financial pinch.

Almost 18 months ago, as we sat through the first Covid-19 lockdown, most firms’ budgets were thrown out the window, and everything became about survival. Cash balances, billings and matter openings were scrutinised daily. If it had not been done before, a detailed cash flow was hastily put together – and suddenly became the management report that truly mattered.  

But then, when the government support initiatives came into effect, and the cogs of the legal market started turning again, we began looking forward. At first it was a month, then a quarter, and then everyone started looking at their expectations for the year ahead, without for one moment taking an eye off the firm’s cash balances. Necessity forced us to adapt how we controlled the business and a market in which we had no idea what was going to happen next made us focus on the key numbers for survival.

Jump forward to the present day and, with ever-more concrete hopes of returning to ‘normality’, it’s important that we take note of all the changes and try not to simply go back to our former ways of running the firm. So, what are the main lessons we can forward?

1. Cash is king 

There won’t be many firms around the country that don’t use a short-term cash flow report now. In my experience, every business benefits from having one, and it’s not something that should be instituted solely in a crisis. Future planning must acknowledge the cash impact – any profit and loss (P&L) budget must include an accompanying cash flow for the same period so that we know how that profit becomes cash. And, if we don’t like the answer, we should revisit the P&L budget. In these uncertain times, our focus shouldn’t be on the vague notion of ‘profit’, but rather ‘profit in the bank’.  

2. Investment appraisal approach to recruitment

The traditional approach of adding headcount when activity levels needed it has always worked well in the past, but this has change in the current climate – now we should consider how quickly hiring adds to profit or cash flow. Bringing a senior lawyer into man an empty desk will always require an initial period of building up their case load and billings and, over that time, their wages and support costs still need to be paid. Over 12 months the hope is that this would become profitable but, for the first six months, it’s more likely to be an outflow of cash, which firms need to be conscious of at the point of hiring. This does not mean you don’t take on the new lawyer, but timing is important for future profitability.  

3. Funding requirements

Both of the above planning changes should lead to a strong view of what funding requirements you have for the next 12 months and how that can be achieved. This puts a firmer focus on just how important it is to have a robust, detailed cash flow for the full 12-months, which looks beyond the 13-week version many of us have always used in our day-to-day business. That focus becomes even more significant when a ‘perfect storm’ is on the horizon, as it currently is for many firms, with all the funding provided last year at the start of the pandemic now having to be repaid. September 2021 appears to be the pinch point for many firms (which may have gone unnoticed if your firm is only doing 13-week cash flows), as they will now be repaying CBILS, VAT deferrals, July tax loans and then have to pay an increased PII renewals on top. The 12-month cash flow will alert you to these points in your cycle and allow you to act ahead of time to raise funding to mitigate those pressures.