This is the second of a series of four posts that outline issues that law firms should consider today in order to be prepared for future recessions... or worse.
Cash is the life blood of a law firm at any time, and it is critical to survival in a troubled economy. Recessions typically result in cash-flow crunches, especially for small and midsize firms, which usually are less able to offset decreased demand in "up side" practice areas with increased needs for counter-cyclical services such as insolvency, restructuring, and litigation. Cash-flow problems are exacerbated as accounts receivable get older. Lines of credit become shorter and more expensive to access. This affects law firms of all sizes, but for small and mid-size law firms lines of credit often disappear completely.
To assess how recession-proof your firm is, consider these cash questions:
- Do you have cash reserves sufficient to pay expenses, including non-owner salaries, for at least 90 days (120 days is even better) without drawing against your line of credit?
- Are all of your equity partners up-to-date with their payments into their respective capital accounts?
- If your firm does not have more than a token capital account requirement for equity partners, do you already have a documented, agreed procedure to raise capital from them, if needed?
- Are all partners accountable for ensuring that unbilled work in progress is invoiced within 30 days, whenever possible?
- Are all partners accountable for pursuing accounts receivable that are more than 60 days old?
- How quickly does your firm bill expenses and disbursements? How can you make this process faster?
- Do you already have an agreement about when, and by how much, to reduce partner draws or base salaries during a cash-flow shortage?
- Have you already maximised opportunities to reduce personnel and facilities costs through outsourcing of internal operations and administrative functions?
- Have you carefully examined the profitability of branch offices? Are there ways to reduce any unnecessary duplication of facilities costs produced by having multiple offices?
Even the best-managed law firms can sometimes find in these questions some significant opportunities to become better prepared to respond the future economic trends.