You can be the best lawyers in the world, and providing the best service, but if your business model is flawed, recent experience demonstrates that the risk of failure is very real. The SRA and Insurers alike are becoming increasingly fixated on financial stability - and with that in mind, I would suggest 4 resolutions:
Resolution 1 - Ensure financial affairs are organised and reports are understood and acted upon. In other words financial stability is assured.
Resolution 2 - Ensure the firm's structure is such that vital decisions are not blocked
Resolution 3 - Ensure there is a succession plan
Resolution 4 - Ensure there is a realistic strategy in place that is affordable and implemented.
Let's look at the resolutions in more detail:
Resolution 1. Financial stability
Business plan
This subject has been at the top of concerns for the SRA for many months. I believe their concern will become even greater during 2014. How is uncertainty overcome?
By having a business plan, which sets out your short and medium term objectives, and explains in sufficient detail how these will be achieved.
In order to do that your objectives must be realistic, affordable and have the support of all the partners.
Include in the business plan sections on a summary of what is wanted to be achieved, a detailed financial plan including budgets, forecasts and cash flows, and don't forget factors and assumptions explaining how the figures have been reached, what the targets are and how you are going to get there. Business plans set out the firm's strategy and set the medium term actions to deliver it. Budgets focus on the short term of usually the next 12 months.
Cash flow
Profitability is important but the most important is cash flow. A firm can be profitable yet in financial difficulty because too much of its resources are tied up in debtors and work in progress.
Keeping accurate cash flow forecasts is vitally important as the firm must maintain sufficient cash in order to be able to meet its obligations.
A cash flow forecast will help prevent this sort of situation arising, providing it is reliable, monitored and used as a tool in managing the business.
Each month, management accounts should be prepared to show how the firm is performing as compared to budget and any major variances investigated.
An organised financial department producing reliable management information, regularly, is one step towards a successful practice and the key is to understand what the reports mean and act as necessary. It is pointless to receive reports and just file them.
Resolution 2 - Structure
How is your firm currently structured, and why? Is it for historic reasons, or has advice been taken recently, and an informed decision made? Should you be a Partnership, LLP, Limited Company or even an ABS? Consider carefully these options and take independent advice.
Partners should feel they are members of a team - and evidence of a silo mentality amongst teams should be viewed as a warning sign. Wherever possible, ensure that more than one partner is involved with a client. It will help maintain the client relationship and encourage the collegiate feeling.
Resolution 3 - Succession Planning
Consider the ages of the partners and review the governing document (Partnership Agreement, Articles etc) for relevant clauses on retirement and bear in mind any potential negative effect on cash flow and capital.
Think about how the practice will be affected if one partner (or more) suddenly says they want to retire, or becomes ill. How would the firm cope? The answer may well vary from department to department, and on the other responsibilities of the partner concerned. These considerations need to be anticipated well in advance, and built into the strategy planning of the firm.
Resolution 4 - Strategy
The partners are a firm's main asset and it is essential to know their likes and dislikes and personal strengths and weaknesses and ambitions. An effective strategy will be shaped around that information.
The whole purpose of introducing the strategy will become pointless if partners are able to ignore it and thus undermine or subvert the project.
The strategy will define the areas in which the firm will specialise. Does the firm, in the words of the SRA handbook "have the resources, skills and procedures to carry out your clients' instructions"? A gaps analysis should inform the strategic direction, and identify remedial actions that need to be undertaken.
I have seen web sites of two partner firms claiming to work in as many as sixteen different practice areas - covering matters as diverse as child care, commercial property, professional negligence, probate, and crime! Before accepting all work, ensure it can be undertaken profitably and responsibly - and bear in mind the likely reaction of your Professional Indemnity insurer!
There may of course be sound reasons for seeking to diversify your practice's work spread: markets change, as do the regulatory and funding contexts. Firms that have traditionally been very reliant on residential property work may also be seeking to reduce the percentage of their income arising from such work - due to the implications for the availablity of Professional Indemnity insurance markets.
Next Steps
No matter how busy you or your partners are in terms of ongoing client servicing work, no business can afford to ingore its business management. Otherwise it is little better than a rudderless ship - aimless and drifting on the tides of chance.
Make the time to examine your financial status and your strategy - and make sure that you, as a business, are following the right course to deliver your objectives.
Eric Golding FCA
Stanley Davis Practice Support Services Ltd
To contact Eric, email: eric.golding@sdgpracticesupport.co.uk