Guest writer, Simon McCrum, gives us his opinion on data that shows law firms can take up to 6 months before they get paid for work they have done.
Looking at the recent piece in the Law Society Gazette, law firms can still take 3-6 months to get paid for their legal work. That’s no surprise to me, or to many law firms. It would be absolutely staggering however to anyone in business “out there”, even before you showed them the torrent of cash that flows out of a law firm every month. 
They’d be equally staggered by other surveys and reports that show that the average UK lawyer works for 8+ hours a day but only manages to record less than 4 (and not all 4 of those are actually “sold” when it comes to raising bills).
It all adds up to a business model and a way of doing business (although it is hardly that) that literally cannot go on. I say that because, to my mind, the walls are closing in on the legal profession.
The tsunami of cash that flows out every month is increasing every year. It has to, in the form of pay rises, or you lose your lawyers. Overheads are all increasing, sometimes astonishingly so. And the response of many law firms? Do more marketing.
It is not for nothing that I am obsessed with helping law firms to become better businesses. They are in the main already good law firms. But that’s simply no longer enough.
If I could point to one fundamental flaw in law firm thinking, it is that PROFIT is seen as the priority. Profit is easy to improve – just record more WIP, and/or send out more bills. That is a time-bomb. A nuclear bomb, in fact.
Both of those things can raise profit but both can be lethal in cash terms – the WIP because you need cash to pay tax on it. Often, bizarrely, the banks want to see more and more WIP because that’s seen to bolster the security they have to cover their increasing borrowings to law firms. Bills can be lethal because you have to pay the VAT on them – out of your own cash - until the client pays the bills. As long as the firm has had a “good billing month” though, or has increased turnover, everything is seen to be okay.
This all ignores the stampeding herd of elephants in the room – the need for CASH, which is something quite separate to PROFIT.
Cash squeezes are overlooked because they can be alleviated by borrowing more for a wider range of things from a wider range of lenders – over and above the usual bank overdraft (which often never seems to go down and which gets squeezed every pay day), there are now also tax loans, Practice Certificate loans, IT loans, even VAT loans available.
And of course, firms come to rely on these – but guess what happens at each loan-renewal time if your last set of monthly Management Accounts reflect a poor month or two? Loan pulled, lights out. It can be that quick.
Why are we, in the legal profession, in this bad place? Law firms are capable of generating a staggering amount of cash, and quickly. They need to put CASH and SPEED OF COLLECTION OF CASH centre-stage. Without cash, there is no oxygen. The disparity between businesses “out there” and their various cash-positive models against the cash-negative models we see in the law, is jaw-dropping. And don’t forget that businesses out there typically don’t have the real pain-point that law firms have on about the 28th of every month. Ask any legal cashier what stress levels are like at the end of the month.
Many law firms remain just that - law firms. They are not legal businesses, or any businesses. A business is by definition obsessed with cash generation and quick cash collection – to them, that is the only valid measure of business success. You will never see Apple boasting about how many phones they’ve shipped out – their boasts are around the cash mountain they sit on.
I mention above that I think the walls are closing in on law firms. I genuinely feel that. What is needed is not a knee-jerk reaction such as increasing marketing activity, which costs money as well as making the firm a busier but still flawed machine.
Nor is the answer ever-greater borrowings from an increasing range of lenders (and believe me, the lenders out there are becoming ever more ingenious at identifying ways and opportunities to lend more and more money to law firms – they’ve got their own cash targets to hit).
Rather, what is needed is a new focus on being a good profit and cash-generating business, where nothing and no-one is allowed to stand in the way of that drive, and where a set number of priorities are embraced (and permanently so) across the business by absolutely everyone in it. Personalities and behaviours and islands and silos and empires and deluded pride in “being busy” and in “billing well” have no place in current, or future law firm “practices”. It’s all about lawyer and partner behaviours – Accounts staff, Finance Teams, and Credit Control can only do so much.
Put simply – look at every part of your firm and ask this: Is it producing maximum cash at maximum speed? No? Well change it.
About the author: Simon McCrum is a solicitor and was Managing Partner of what became the UK’s fastest-growing law firm. He now helps law firms to become “the perfect legal business” through his Management Consultancy work and his Training Academy – see www.mccrum.legal – and he is author of “The Perfect Legal Business” and “The Perfect Lawyer”. He is currently writing his third book, “The Perfect Partner”.
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