Although not directly impacted in the same way as businesses in the retail, leisure and hospitality industries, the legal sector has found that Covid-19 has triggered challenging market conditions. A recent survey suggests that revenues in the first quarter of 2020 are down over 6% on the last quarter of 2019, and are at the lowest level in four years. There are some more obvious reasons for the downturn such as the closure of courts and land registry but the demand for other legal services, especially around transaction support, are also suffering a dip as projects and commercial transactions are put on hold or abandoned altogether due to the current financial climate.
But as lockdown restrictions ease and the economy hits the restart button, how will the market for professional services fare? The support measures from the UK and Scottish Government have been welcome but these funding measures will eventually be withdrawn (the furlough scheme has already been confirmed to end in October) at which point businesses will need to be able to stand on their own two feet. Businesses that fold will translate as lost clients and lost revenue opportunities which will further restrict the legal sector’s ability to recover from the market downturn.
It is therefore vital that there is focus now on realising and conserving cash to enable firms to ride out possibly tougher times ahead. Be in no doubt that at times like this, cash is king. Some practical examples and areas of potential focus are set out below:Cashflow Forecasting
Using accurate forecasts to identify expected income and cash burn for each day should prevent unexpected liabilities cropping up. Forecast for every possible eventuality, as well as what the business will look like when normal service resumes.
Remember that any deferred or time-to-pay agreements still need to be paid. Make sure these are included in future cashflows and forecasts to prevent any nasty surprises in a few months.
Looking after Employees
Employees are the back-bone of any business and this is particularly relevant in the legal sector where revenue is driven by selling staff’s time and expertise. Despite this, it is estimated that over one third of solicitors working in Scottish legal firms have been placed on furlough.
As the level of financial support for employers via the furlough scheme reduces over the next few months, it important to formulate a plan to return employees to work and utilise the new flexible furlough options, which should enable firms to gradually increase working hours in line with increased activity levels. If demand for services does not return to the levels before lockdown, reduced working hours may be an alternative to outright redundancy.
For employees working remotely, make sure IT systems enable them to be productive. Now, more than ever, communication is key – being open, honest and communicating regularly will help maintain morale and team-spirit.
Work in Progress
Review WIP to see what can be billed now and in the short-term. Be realistic and deal with WIP balances which are not billable or not recoverable in full.
Actively Manage Accounts Receivable
Remember that clients are likely to be in the same boat, so communication and compromise are so important. Find out when and what customers can pay. Whilst wanting to generate as much cash as possible, it is worth remembering that it is preferable to receive some payment rather than risk getting nothing at all.
Review outgoings and filter liabilities/recurring expenses by amount, frequency and whether they are critical for on-going trade. Halt any expenditure that is not vital. Recruitment freezes, particularly where firms hire an intake of graduates on an annual basis, has been a common strategy across the sector.
Get in touch with higher and longer-term creditors – they may be able to agree a mutually satisfactory payment plan. Also, speak to the bank and other creditors to see if they are willing to provide a payment holiday or reduction for the next few months.
Where premises are rented, liaise with the landlord to request a payment holiday or even split the next quarter’s payments over a longer period provided the terms of the lease allow for this.
Although not necessarily a popular strategy, can the partner group afford to restrict drawings in the short term? Identify whether any of the partners, particularly more junior partners, would qualify for the Self Employed Income Support Scheme. This should strictly be income of the partnership rather than be retained by individual partners.
For these and other practical steps you can take to protect your business, getting financial advice on your options as early as possible is key. Please contact your usual AAB advisor or alternatively Jill Walker or Derek Mitchell would be pleased to discuss how AAB can help.
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