This is a marked change to the buoyant economy that we had enjoyed until midway through 2007. Currently the largest law firms are announcing some very encouraging financial results, but these reflect the profits generated in 2007. There is a possibility that, as the credit crunch takes hold, the results for 2008 will not be so impressive. As early as February this year, the British Chamber of Commerce signalled that 2008 would be a difficult year for British business. For the first time since the mid-1970s, the word ‘stagflation’ has reappeared.
But what does this mean for law firms around the country? There is no clear answer to this question, as success depends in part on the sector in which a particular firm specialises. However, those whose businesses focus on the sectors that are currently suffering the most from the credit crunch are firmly in the spotlight. HBOS predicted in June that house prices could fall by as much as 9% this year, while research consultancy Capital Economics has gone even further and suggested that as much as a third could be wiped off the value of house prices over the next two to three years. HBOS also predicts that
From these statistics alone, it is clear that those law firms that have depended heavily on conveyancing, banking and other property-related business are much more at risk from the credit crunch than those whose business is more diverse.
Lawyers in demand
Conversely, lawyers who are strong in insolvency law, litigation or restructuring should profit well from the current economic woes. The Insolvency Services reported that insolvencies amongcompanies in
Nonetheless, the credit crunch does provide a very good reason why all law firms, whether in sectors that will be particularly susceptible to the credit crunch or not, should take a good hard look at their finances. At the very least, inflation (as measured by the Consumer Prices Index) has already topped 3% and there are some commentators who predict that it may well reach 4%. Wage inflation is not yet rising — protected by employees’ fears over job stability — but there is no guarantee that this situation will remain.
Combine this with the fact that the sterling exchange rate has dropped in recent months, making revenue from overseas worthless, and the fact that money markets have soared, prompting the Bank of England’s Monetary Policy Committee to consider increasing the Bank base rate, and the case is clear: more than ever, all law firms should look at their finances and see what steps they can take to improve the bottom line.
Seek value for money
Do not just take the first offer. Whatever the cost to your firm, you should not simply accept whatever costs are presented. From office supplies to funds for major projects, you should always compare the costs of various suppliers. In particular, many professional firms simply accept the costs associated with their financial affairs. An example of this is current accounts — how long is it since your firm opened its account and how long since you have checked that it remains competitive? The chances are that the time periods are the same. In many firms, the fees on the practice’s bank account and overdraft are simply absorbed, whereas some research into the current accounts now available may reveal that there are considerable cost savings to be had.
Use the specialists
Cashflow is always an issue for any firm. However, in times of economic downturn, good cashflow management can make a great difference to the overall profitability of a practice. While good housekeeping measures as already described can make a difference, there nonetheless remain some large expenses that firms must meet if they wish to remain trading. These include payment of the premium for professional indemnity insurance, bills issued by HM Revenue and Customs and the annual renewal of practising certificates.
While your firm can always turn to the institution that provides its current account to request funding, this can cause some issues. First, the new borrowing required can upset whatever arrangements are already in place with the bank. Second, these arrangements are a ‘catch-all’ and simply provide funds to the firm, which still have to be transferred to your creditor, within the permitted timescales — and when the creditor is a body such as HM Revenue & Customs (HMRC), there is of course no scope for an extension of thedeadlines!
Specialist providers can not only provide finance but often can settle bills direct — whether this is a tax bill or perhaps even the premium on your firm’s professional indemnity insurance. In either case, this can mean that the payment reaches your creditor several days earlier than it would if you used your own bank — unless you are happy to incur additional bank fees for electronic transfer of the funds.
Compensate for late client payments
If law firms are feeling the squeeze, it is likely everyone else in the cashflow chain is feeling it too — including clients. While your firm needs to settle its quarterly VAT bill promptly, you may not have been paid by the client at the time you have to provide HMRC with funds. After all, your VAT bill is based on billings during the quarter. If a bill is issued days before the end of your VAT quarter, it is quite possible that the client’s payment will not be sitting in your bank account within the 30 days you have to pay your bill.
Options here are to ensure that your firm bills efficiently and quickly, as well as following up outstanding invoices. Where you do not have the funds to meet the bill outright, there are specialist loan products available that enable you to swap one large VAT payment for a series of smaller outgoings, with the lender paying HM Revenue & Customs direct to ensure you do not incur any late-payment costs.
If you were to commission a builder to construct a house for you, you would not expect to pay him nothing until the house was complete — the norm is a series of stage payments. But law firms are often content to leave billing a client until their case is fully resolved and this can take years. Instead of shouldering all the costs until the case is complete, firms should look to bill clients on an ongoing basis, with a final payment due at the conclusion of the case. For matrimonial, probate and some negligence cases, specialist professions finance providers can offer loan facilities to these clients. These pay your fees directly to you, yet the client pays only the interest due until the case is settled or a given time period is reached.
It is clear that law firms are already feeling the pinch: we have seen a massive increase in requests for funding this year as firms use finance to bridge gaps in their cashflow. However, by planning ahead, many firms can improve their finances at a time when money is under pressure and ensure that their firm is in a strong position to weather the economic downturn.
Nick Sanders is managing director of Key Business Finance.
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