Achieving financial stability
under OFR
The scope of our course today
1.
2.
3.
4.
Understanding the requirements of the Code
Identifying your priority financial stability challenges
Using financial measurement to manage financial stability
Managing partner compliance and performance to achieve
financial stability
5. Maximising your cash flow
6. Building profitability
7. Constructing your financial stability action plans
1. Understanding the requirements of the
Code of Conduct regarding financial
stability
“stability”
Firmly fixed or established;
Not readily changing or fluctuating;
Not easily destroyed or decomposed
PETER SCOTT CONSULTING
Outcome O (7.4) – Code of Conduct
“you maintain systems and controls for monitoring the financial
stability of your firm …
and take steps to address issues identified”
PETER SCOTT CONSULTING
Acting in the following ways may tend to show that
you have achieved these outcomes …
IB (7.2) – controlling budgets, expenditure and
cash flow
IB (7.3) – identifying and monitoring financial ….
risks including ….credit risks and exposure …
PETER SCOTT CONSULTING
Outcome O (10.3)
“you must report to the SRA promptly any material
changes to relevant information about you, including
serious financial difficulty
PETER SCOTT CONSULTING
‘material’?
Guidance Notes to Rule 8 Authorisation Rules provide, in relation to a failure to
comply:
(x) In considering whether a failure is “material” and therefore reportable, the
COLP or COFA, as appropriate, will need to take account of various factors,
such as:
• the detriment, or risk of detriment, to clients
• the extent of any risk of loss of confidence in the firm or in the
provision of legal services
• the scale of the issue
• the overall impact on the firm, its clients and third parties.
Acting in the following ways may tend to show that you
have achieved these outcomes …
IB (10.2) – actively monitoring your financial stability and
viability in order to identify and mitigate any risks to the
public
IB (10.3) – notifying the SRA promptly of any indicators of
serious financial difficulty …..
IB (10.4) – notifying the SRA promptly when you become
aware that your business may not be financially viable to
continue trading as a going concern …..
PETER SCOTT CONSULTING
Examples from the Indicative Behaviours which may mean you
are not achieving the financial stability outcomes
IB (10.3) – notifying the SRA promptly of any indicators of serious financial
difficulty, such as inability to pay your professional indemnity insurance
premium, or rent or salaries, or breach of bank covenants
IB (10.4) – notifying the SRA promptly when you become aware that your
business may not be financially viable to continue trading as a going concern,
for example because of difficult trading conditions, poor cash flow, increasing
overheads, loss of managers or employees and / or loss of sources of
revenue.
What should law firms be doing to make
financial stability a PRIORITY?
 Identify who should be responsible for financial
management
 Review financial measurement and reporting
 Financial education and training
 ‘Cash is king’ - take control of cash management
 Drive up revenue / control overheads
 Establish an ‘audit trail’
 Adopt ‘zero tolerance’ and ‘partner accountability’
PETER SCOTT CONSULTING
Who should be responsible for financial
management?
 FD?
Managing Partner?
Both?
Others?
PETER SCOTT CONSULTING
Establish an ‘audit trail’
“If you cannot demonstrate compliance we may take
regulatory action”
Measure what matters
Report effectively
Train your people
Take advice if issues arise
PETER SCOTT CONSULTING
Take appropriate advice, act on it and
document it
NB – COLP’s and COFA’s responsibilities
Outcome O (10.1) – you ensure you comply with all the reporting and
notification requirements in the Handbook that apply to you
Indicative behaviour IB (10.5) – notifying the SRA of any serious issues
identified as a result of monitoring referred to in IB (10.1) and IB (10.2) and
producing a plan for remedying issues that have been identified
PETER SCOTT CONSULTING
2. Your financial stability challenges?
Cash flow
• To manage the bank overdraft?
• To pay out last years profits?
• Not to have to contribute more capital?
• To pay out retiring partners?
Profitability
• To improve PEP by [ ]%?
• To deal with partner underperformance?
Others?
3. Using financial measurement to manage
financial stability
Measure what matters
Measure what matters
What is the purpose of financial
measurement and reporting?
PETER SCOTT CONSULTING
To provide clear information to those
running the business to enable them to:
- Know what is happening / will happen in the business
- Make decisions based on sound knowledge
- Take effective action
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Financial measurement and reporting
- creates KNOWLEDGE
- manages RISKS
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Risk and Knowledge Management
Risk
Knowledge
Management
Management
Financial measurement enables a
business to manage performance
PETER SCOTT CONSULTING
If you cannot measure it, you cannot
manage it.
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What do you measure?
What do you report on?
Is your financial measurement and reporting
helping or preventing you achieving your
objectives?
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Do you produce data or information?
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How do you use the financial information
you produce?
PETER SCOTT CONSULTING
In a law firm what needs to be measured
- and why?
PETER SCOTT CONSULTING
Examples of what matters
-How can we measure the financial performance
of each part of our firm?
-How profitable / loss making are each of our clients?
-Which parts of our firm generate good cash flow
or soak up cash?
PETER SCOTT CONSULTING
Do you measure things which do not need to be
measured in order to run you business
- more effectively?
- more profitably?
- to generate more cash?
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Do you / your people use everything you
measure / report?
If not – why do you measure it / report it?
PETER SCOTT CONSULTING
Is there anything you should measure
which you do not currently measure and
report on?
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Your key performance indicators?
PETER SCOTT CONSULTING
Test your KPIs
•
•
•
•
•
Why do we produce this information?
Does it tell us what we need to know about our business?
What does it not tell us about our business?
Do we ever use this information?
If not then why do we produce it?
PETER SCOTT CONSULTING
Real time or historical information?
For example
- billings
- input
PETER SCOTT CONSULTING
Your desired Outcomes?
-
Accelerating cash flow?
Improving profitability?
Building performance?
Effective business development?
Managing your risks and compliance?
- Others?
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Hard copy or available on line?
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Frequency of reporting?
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NB - inaccurate reports destroy credibility
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Who needs what?
How far do you disseminate financial information in
your firm?
- and for what purpose?
PETER SCOTT CONSULTING
Is it enough just to provide reports – or do you
need to do more?
The role of financial education in a law firm?
PETER SCOTT CONSULTING
Financial education and training
“I don’t have a clue about the financial reports I
receive”
 What do you want each partner / fee earner to financially
manage?
 What do they need to know to be able to do this?
PETER SCOTT CONSULTING
Do your partners / other fee earners have
financial knowledge gaps?
Do they understand why you provide them with
financial reports?
Do they understand why you are asking them to
take a certain action?
PETER SCOTT CONSULTING
Would a financial education programme for your
firm help to achieve desired outcomes?
NB – training is a good way to demonstrate
compliance
PETER SCOTT CONSULTING
4. Managing partner compliance and
performance to achieve financial stability
Get your partners into shape
Financial management of a law firm is not so
much about figures but all to do with
managing people (particularly partners)
Zero tolerance – partner accountability
 Are your partners prepared to be managed?
 The COLP and the COFA will not be able to effectively carry
out their roles unless every partner accepts the principle of
‘accountability’
PETER SCOTT CONSULTING
Your partners
• Their behaviour
• Their performance
In the good times …..
• Why rock the boat?
• Financial under-performance tolerated
In an economic downturn …..
• Margins will be under pressure
• Cash will be tighter
• But will firms get to grips with financial
under-performance?
How can law firms address
financial under performance
issues in an economic
downturn?
Make the most of what you have
Work smarter, not harder
Do the basics better
Slick
Graphics
Hyperlinks
Cool
Nice Pictures
Your
financial results
GUI Stuff
Your partners’ willingness to be managed
One of the most sensitive issues for
law firms
• Highlights the tension between
- need for modern business practice
- traditional professional partnership
BUT
• If you deal effectively with the problem
• The benefits can flow to bottom line
Under performance = ?
• Firms which under-perform will not be
competitive
• They will lose business
• They will not attract and retain the best people
A downward spiral
Building higher performance
• How much is financial underperformance costing?
• What are firms going to do about it?
Do you recognise any of
these?
“Heavyweight gorilla”
“You can’t
manage me.
I’m a big biller!”
“That’s a great idea
…for the rest of you!”
“Ahh…only five more years to
go”
Are you forever pushing at a closed door?
Is your firm firing on all
cylinders?
Answer – Yes / No
Are all your partners
hungry?
Answer – Yes / NO
Do all your partners want to
earn more?
Answer – Yes / NO
Do you have the ‘right
partners’ on board to help
you to achieve your goals?
Answer – Yes / NO
Are all your
partners prepared
to be managed?
Answer – Yes / NO
Are all your
partners supportive of
management and of each
other?
Answer – Yes / NO
Are all your
partners prepared to be
accountable?
Answer – Yes / NO
Are there sanctions on a
partner who refuses to
comply?
Answer – Yes / NO
Do all your partners have
sufficient financial discipline?
Answer – Yes / NO
Can you say your firm has no
under performing partners?
Answer – Yes / NO
Do you know how much
underperformance is costing
you?
Answer – Yes / NO
Should all your equity
partners really be equity
partners?
Answer – Yes / NO
Are you prepared to face up
to your issues and deal with
them?
Answer – Yes / NO
Are you prepared to change
every ‘NO’ to a ‘YES’?
Answer - ?
Are you prepared to provide the
LEADERSHIP required for change?
Accountability
“We have no room for those who put their
own personal agenda ahead of the
interests of the clients or the office”
David Maister’s “Predictive package”
Embody accountability into your governance
arrangements
For example
 Undertakings to be compliant
 Agreement to do everything necessary to enable COLP and
COFA to effectively carry out their roles
 Include indemnities to COLP and COFA
 Sanctions on those who do not comply
PETER SCOTT CONSULTING
Sanctions
•
•
•
•
Necessary?
Choice of sanctions?
Do they work?
Examples
5. Maximising your cash flow
Who feels like this?
Cash is king - take control of your cash management
Instructions
Work
W.I.P
billing
Cash
payment
PETER SCOTT CONSULTING
Debtors
Cash management priorities
 taking instructions
Managing the WIP
Managing debtors
Above all – managing partners!
PETER SCOTT CONSULTING
Working capital
 What is our firm’s working capital requirement?
 What is our debt / equity ratio?
 Are we able to consistently keep within our banking arrangements?
 Is a cash call on partners likely to be required shortly?
 Are we able to make distributions to partners from last year’s profits?
 Will we be able to pay January’s tax bill?
 Will we be able to repay capital to partners when they retire?
PETER SCOTT CONSULTING
Work smarter, not harder
Do the basics better
Put the squeeze on your business
How to get to grips with financial and performance issues?
Analysis is key
With a view to….?
• Diagnosing the causes of slow cash generation
• Diagnosis will point to solutions
Avoid Financial Information Overload
KEEP IT SIMPLE
Work in progress
For each work type/group/partner
•
•
•
•
•
•
•
•
Monthly WIP carried over last 12 months
Current aged WIP
Billing profile over last 12 months
WIP at last three year ends
Billing targets
Terms of business
Money on account
Unbilled disbursements carried
Work in progress
Relatively easy to measure, monitor and value
HOURS
RATE
BOOK WIP
Adjust for realised rate
Important KPI – should
be calculated monthly
Provisions
Regular review and
assessment
Accurate WIP value
Debtors
For each work type/group/partner
•
•
•
•
•
•
Average value of debtors carried
Current aged debtors
Cash collection profile
Cash collection targets
Terms of business
Monies held on account of bills
Debtors - actions
•
•
•
•
Cash collection targets
Review all unpaid bills over 30 days
Use your credit control system
Link cash collection to distributions of profit
Lock Up
Means value of work tied up in WIP and debtors
-Plus disbursements
Expressed as number of days
-the time taken from doing work to getting paid
Therefore calculated on production not billing
-Billing lock up calculations distort this view
Use to benchmark each area by what we would expect
- Need to link this to funding
How much is your ‘lock-up’?
• “lock-up” (work done not paid for)
= WIP
+ Unbilled disbursements
+ Unpaid bills (net of VAT)
• “Excess lock-up?”
= WIP over [ ] days?
+ Debtors over [ ] days?
What do ‘leading edge’ firms do?
(See notes)
LOCK UP AND FUNDING
•
•
•
•
If keeping pressure on lock up…
…but running short of cash
And profits are being maintained…
…with significant growth being experienced
• Then business is becoming under funded
– Mix of capital, borrowing and credit taken
• Risk of overtrading
– Cannot fund growth in working capital
– More acute if not on full earnings basis as will be
looking at wrong measures and drawing wrong
conclusions
Lock-up
For each work type/group/partner
• Average lock-up as % of annual turnover
• Aged lock-up
• Value of one day’s/month’s lock-up
Cash outgoings
•
•
•
•
Monthly cash outlay
Monthly cash receipts
Monthly NET inflow/outflow
Cash flow projections
Finance group infrastructure
•
•
•
•
Structure/headcount
Credit controllers / revenue managers
Credit control / cash management procedures
Billing and collection policies
• Systems
How to use your finance team to
maximise cash management
Is your team performing?
Financing of practice
• Working capital requirement
•
•
•
•
•
•
Partners’ fixed capital
Current account balances
Profit distribution policy
Tax reserves
Bank facilities
Borrowing profile over last 12 months
Cash Flow – finding solutions
•
•
•
•
•
•
Produce a cash generation plan to focus on (in order of
priority):
How practice is to be financed
Partner accountability - sticks/carrots
Forward cash position goals
Billing targets by person/group
Collection targets by person/group
Alignment of infrastructure to goals
Cash management
Partners’ capital should not be for
supporting financial under
performance
Taking instructions/risk management
– You are providing clients with credit, but you
are not being paid to take credit risk
– Terms of business
– Money on account
– Disbursements
Benchmarks (= our new lock-up targets)
• WIP – no more than [ ] average?
• Debtors – no more than [ ] days average?
• Lock-up – [ ] days maximum?
How much working capital would a 30 day
reduction in your lock-up release?
Cash Management
• Set minimum acceptable balance
- eg £100k headroom to avoid o/d
• Simplify cash flow
- all figures to be gross (inc VAT etc)
• Each month calculate cash needed to cover
all outgoings for next 3 months (including
partners’ drawings and distributions)
• Calculate and broadcast weekly cash
collection targets
Cash Management (2)
• Report weekly on cash collection
• Plan billing targets to generate cash to pay
major outgoings (November bills to pay
January tax)
• Recognise consequences of deviations
+/- £25k per week = +/- £325 per quarter
• Payments to partners to depend on cash
collection
Cash collection targets (1)
Cash collection targets (2)
Effect of £25k per week variance
500
400
300
200
100
0
-100
-200
-300
Novembe r
De cember
January
Cash Colle ction +£25k per wee k
Cash Colle ction on Target
Cash Colle ction -£25k per we ek
February
6. Building profitability – practical
steps to make a real difference
Margins are being squeezed
Drive up revenue – control overheads
Flabby law firms are failing
To drive up revenue
To drive down costs
PETER SCOTT CONSULTING
Maximising profitability
Work smarter, not harder
Efficiency
• Efficiency = Utilisation x Recovery
• Utilisation = chargeable hours recorded as a %
of standard working hours (220 days x 7 hours =
1540)
• Recovery = % of recorded chargeable time billed
How to get to grips with profitability issues?
Analysis is key
Scope of analysis?
• Where the firm is making or losing money
– To determine areas for investment
• Benchmarking performance
– Internally and externally by department
• Trend analysis
• Recommendations on KPIs
Avoid Financial Information Overload
KEEP IT SIMPLE
Profitability factors
• Work types
• Clients
• Leverage
• Pricing
• Matter related hours
• Realisation rate
• Major overheads
The work type / client type focus is
crucial to profitability
Profitability factors
• Work types
• Clients
• Leverage
• Pricing
• Matter related hours
• Realisation rate
• Major overheads
Work types
• Each work type as a % of overall turnover
• Net profit per equity partner for each work
type/group
Clients
• Total numbers of clients in each of last three
years
• % of turnover represented by top
10% / 20% of clients (by billing value)
• Net profit derived from each of above categories
as a % of total
• Ditto for bottom 10% / 20%
The competitive moves
High
Perceived
Added Value
X
Ave
Suicide
Zone
Low
Low
Ave
Perceived cost
High
Profitability factors
• Work types
• Clients
• Leverage
• Pricing
• Matter related hours
• Realisation rate
• Major overheads
Leverage
For each work type /group
• Net profit per equity partner
• Number of fee earners (including partners)
• Experience of each fee earner
(including partners)
• Delegation
Leverage will differ from group to
group
Will depend on:
• work type / client type mix
• How the group ‘adds value’ to its clients
Each group to consider how it should be
leveraged for maximum profitability
Leverage – each group should be
broadening the base
Equity partners
Other fee earners
Instead of doing this
Equity partners
Other fee earners
Delegation is key to profitability
• Match the work to the appropriate level
of expertise / cost
• Sell at the right price!
Each group to consider how it should
delegate more to increase its margin
Leverage and delegation involve
teamworking
Why are teams important?
Teams provide
• Support
• Ability to delegate
• Continuity of service delivery
• Sense of purpose /Esprit de corps
• Accountability / peer pressure
Each group to consider how to build their teams
An integrated strategy
Leverage
Delegation
Focus
Adding
value
Profitability factors
• Work types
• Clients
• Leverage
• Pricing
• Matter related hours
• Realisation rate
• Major overheads
Pricing
For each person/work type/group/client
•
•
•
•
•
•
Headline rates
Local comparables/competitiveness
Recovered rates
Latest rate changes
Value billing arrangements
Fixed fee work
Profitability factors
• Work types
• Clients
• Leverage
• Pricing
• Matter related hours
• Realisation rate
• Major overheads
Chargeable hours
•
•
•
•
•
•
•
Methods of recording time
Units of recorded time
Frequency of reporting
Available time
Recorded chargeable hours by person/group/firm
Targets set
Sector norms
Profitability factors
• Work types
• Clients
• Leverage
• Pricing
• Matter related hours
• Realisation rate
• Major overheads
Realisation Rate
• W/O of WIP by each person/group/firm
at selling price
• Every 1% of realisation rate = ?
• W/O of debtors by each of above groups
• Disbursements written-off
Profitability factors
• Work types
• Clients
• Leverage
• Pricing
• Matter related hours
• Realisation rate
• Major overheads
Major Overheads
• Salary costs as % of total overheads
• Salary costs by group/work type
• Premises/Equipment costs as % of total overheads
• Professional indemnity costs as % of total overheads
• ZBB applied?
People costs
Gross profit as a key performance
indicator?
Measures of profitability
Bills Delivered
Billing
X
Other income & w/os
X
WIP movement
__
Income
X
Costs of employment
Gross profit
(%)
Direct Overheads
Contribution
Indirect overheads
Operating profit
(%)
Add back notionals
Profit before tax for EPs
Full Earnings
X
X
X
X
X
X (%)
X
X
X
X
X
X (%)
X
X
X
X
X
X
X
X
Control overheads – how ‘lean’ are you ?
 Is this overhead really necessary for the efficient and
profitable operation of our firm or could we do without it /
use it less?”
 We know we must have this overhead, but how can we
reduce the cost of providing it?”
PETER SCOTT CONSULTING
Profitability – finding solutions
•
•
•
•
•
Net profit per partner is priority – focus on:
Nature of business/clients
Improving leverage
Pricing
Increasing chargeable hours
Improving recovery rate
• Reducing waste
Profitability – finding solutions
Focus on :
building the top line
.
Build the ‘top line’ – make the most of what
you already have
 price work (for profit);
 manage work to a price to achieve the required margin;
 fully record matter-related time; and
 maximise the realisation (recovery) of work in progress on
billing.
How much more profit would you make if you did each of those
just a little better?
PETER SCOTT CONSULTING
Who is never guilty of the ‘Triple Whammies’?
The TRIPLE WHAMMIES –
• Under pricing
• Under recording
• Under realisation
Pricing
If…
• You have 30 fee earners
• Each averaging 1000 hours p.a
• Increase rates by £10 p.h and fully realise
How much more revenue will you generate
in a full year?
£10 p.h rate increase across the board
will produce…
£300K additional revenue
RECORDING
MATTER RELATED TIME
- to make fee earners more
productive
‘Why should I fully and honestly
record all my matter related
time?’
Do you know your matter related
hours target?
Are you on target?
Time
How have you spent your time today?
Time
How much of that time have you
recorded as matter related time?
Time
How much of your matter related
time today have you not
recorded?
Why not?
What is ‘matter related time’?
Why is matter related time not recorded?
I was told not to record time
on the matter!
‘Because I am not worth it!’
‘The job will not justify all my time!’
‘I cannot be seen to have big write –
offs’
I don’t have enough time to
record!
I don’t have enough time to
time record!
I can’t remember what I did
during the day!
Time is not relevant to our part of
the firm’s business
Recording matter related time is
relevant to EVERY part of a
firm’s business
Why is recording matter related
time so important?
Time is an important
management tool
Time is about a firm’s
financial health
1. How to estimate a fee?
‘How much will this cost me?’
Time is just one factor to be
taken into account in arriving at
the right price for the job
If you under record time you are
pre-judging the decision as to what
is the right price for the job.
Whose decision?
If you consistently under record time on
your work it will not be possible to safely
quote a price for a job in the future
because you will not know how much
that job will cost you to do
2. Are we working profitably?
How do we know we are
profitable if we do not know
how much our work is
costing the firm to do?
3. How to budget for revenue?
Number of fee earners
X
Their agreed target chargeable hours
X
Their hourly rates
4. Are we ‘on budget’?
Fully recording matter related time
enables us to compare
performance with budget
5. Fully recording your time will
help you to achieve your billing
targets more easily and quickly.
How?
An extra 30 minutes recorded per day?
30 minutes X 220 working days pa
= 110 hours
110 hours at £200 ph = £22,000
6. Management of workloads in
groups –
- who is busy?
- who is not so busy?
How easy is it for you to record time?
Do you need more training?
Realisation rate
• Every 1% on your realisation rate = ?
Write off policy
• How much do you write off each year?
• Introduce a write off policy eg:
- all time to be w/o more than £500 or 5% of
recorded time whichever is the higher has to be
approved by managing partner
Benchmarks (= our new targets)
Realise 95%+ average of wip
- your current average?
If…
you halve the amount you write off, by how
much will your annual profits increase?
By reducing …
• Under-pricing
• Under-recording
• Under- realisation
how much more profit would you
make?
2012 / 13?
WE ARE GOING TO earn
PEP of
£[
]K
Is this realistic? - to be tested
Do we all want that?
7. Your financial stability action plan?
• Cash management
• Profitability
What are you going to
take away from today
and do something about?
Any questions?