Effective cash flow management is more important than ever. Pambos Patsalides gives a guide to getting it right.

Managing your working capital – the amount of money needed to bridge the gap between paying out your outgoings and getting paid by your clients – has a major impact on the financial headroom you can create to enable you to continue making the drawings you expect. However, more recently, with some banks becoming more demanding regarding bridging cash flow shortfalls, this balancing act has become critical to a barrister's overall survival. Entrenched in this balancing act is the management of lock-up and your ability to look in to the future to deal with the cash flow peaks and troughs that may be looming.

First, let's go back to the basics of lock-up. Say your annual income is £400,000 and your debtors (clients that owe you money) amount to £100,000. Your lock-up (calculated by dividing debtors by annual income and multiplying by 365 days) is 91.25 days, say three months. This means that, on average, if you worked on a case in January and billed it by 31 January, you do not get paid for that work until the end of April. If you set an objective of improving lock-up by 30 days (i.e. getting paid in this hypothetical scenario by 31 March) the effect would be to A careful balancing act Smarter working capital management reduce lock-up by £33,000 – increasing cash in the bank by the same amount. This means you are less likely to require additional finance for day-to-day activities – either externally or from non-business reserves.

Here are some practical steps that should improve lock-up:

  • Manage your clients' expectations – provide a quote before you start work and agree a billing and payment schedule in writing in advance. This should also help to minimise fee disputes.
  • Give early warning on fee changes – if costs are likely to exceed your fee quote, advise your client immediately and agree a new billing and payment schedule.
  • Monitor billing regularity and debtor days – instigate lock-up and billing targets.
  • Raise regular fee notes – render fees on account where possible.
  • Don't forget disbursements – ensure timely recharge to clients.
  • Be prepared to discuss/explain a fee note – make resolving billing issues a priority.
  • Separate and empower debt collection – ensure you have specific support and systems in place to make billing and collection as easy as possible.
  • Adopt a standard procedure for chasing unpaid bills – through timely statements, reminders and a friendly call from the clerks.
  • Understand your client's situation – be aware of how the current economic environment is affecting your client and the likelihood of your fee being paid on time, or at all.
  • Recognise issues specific to your practice – different factors and difficulties will apply depending on your practice. For example, seeking payment of legal aid.

Your future cash flow requirements should not be left to chance. You should forecast your cash flow projections on at least a 12 month rolling basis. This discipline will ensure that pressure spots such as your tax, VAT and rent/dues payment dates are identified and do not come as a shock. The projections model should be based on assumptions regarding income timing and quantum and take account of known and uncertain costs. Build sensitivities in to your model so that you can understand the parameters you have to play with – what is the effect of collecting cash from debtors a month earlier? If you have a loan or overdraft facility share your projections with your facility provider and keep them informed of changes, giving them plenty of warning regarding potential breaches in facility limits or covenants. If tax payments are difficult to meet discuss methods of mitigating or managing the position with your accountant as early as possible.

Cash flow management needs be a multipronged approach. Lock-up certainly needs to be managed actively. However you also need the right tools to look at least 12 months in to the future and to predict the pressure points before they happen.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.