How your law firm should deal with the downturn
BDO has been appointed to help more UK legal partnerships in the last 18 months than ever before. While it would be nice to think this is the result of our great work and growing profile in the legal sector, the reality is more sobering. Law firms are in trouble.
The recession has hit professional partnerships and limited liability partnerships (LLPs) hard. The press carries news of major and medium-sized firms axing staff and partners, with many practices in to their second or third round of cuts.
We have seen a rise in the number of disputes in professional firms. Good partners and staff, and even whole teams, are leaving businesses where they feel the firm is under pressure and there is dissatisfaction with under-performing departments.
What firms need to do
In this environment, hiding your head in the sand really is not a good idea. You need to take a long, hard, warts-and-all look at your firm's finances. Before you go to the banks you need to have all the financial information available.
Know the problems and have a strategy in place. Ask yourself:
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Are you monitoring payment terms and billing points to make sure the work done by your staff and partners is being converted to cash as quickly as possible? Have you taken a good look at the way you are monitoring levels of work in progress (WIP) and the amount of time being booked to cases by staff and partners? You should be seeking to minimise the levels of WIP on cases and be billing clients at regular intervals. You should also be keeping clients informed so there are no surprises or reasons for them to delay payments.
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Are your practice management systems helping or hindering your business? If they are outdated you might be better off reviewing them now. An overhaul may well produce an overall cash injection into the firm even after the expense of bringing things up to date, as WIP and debts are converted into cash much earlier.
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Are your relationships with your bankers as good as they should be? If not, what are you going to do about it? You must keep your bankers informed: what they don't want or expect to see are surprises, so working with them on a regular basis and seeking their advice can only help.
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Do you have enough capital to buffer any further downturn in trade? If not, what are you going to do about it? You should be looking at the level of drawings you have taken out in previous years to see if they are still appropriate and reflective of the performance of the practice in today's harsher economic climate.
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Are your employees, both fee-earning and administrative, fully utilised? Have you identified the high fliers and the poor performers? Could staff be better employed in other departments and are their skills transferable? Firms need to be much more flexible and smarter in how they use their resources than before.
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Is your WIP properly and commercially valued? How do you know?
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Look at your best performing departments. Are you doing enough to keep these people motivated? If not you may be storing up trouble for the future.
Do you need help?
We have saved a number of partnerships from the formal bankruptcy of the partners, sold and reorganised partnerships, refinanced and resolved disputes within partnerships and solved tax problems.
In the current economic environment, there is no penalty for taking early action – but delays can be critical.
To discuss this article or partnership dispute issues in general, contact Alex Marsden at alex.marsden@bdo.co.uk or 0161 817 7507, or Gavin Wright at gavin.wright@bdo.co.uk or 0161 817 7514.
