Steps to ensure firms have financial stability and agility

With the country seemingly turning a corner on the pandemic, now is the time to revisit financial plans and processes around cash flow, says Kate Arnott, head of professional services at MHA.

As we see the gradual relaxing of Covid-19 pandemic restrictions and move closer to the ‘new normal’, it’s perhaps time for professional services firms to take stock and revisit the strategic plans that may have been neglected over the past year.

The most successful firms are those able to react quickly to events, relying on regular, accurate business and management information to make strategic decisions in real time, rather than waiting for historic data they can no longer do anything about.

Financial statements are produced on an annual basis and show only the historic performance of a business. Management accounts, on the other hand, track the ongoing process of measuring performance on a regular basis and include other financial data that assesses performance, such as cash flow, variance against targets and benchmarking data.

Particularly in uncertain times, having good management information allows firms to increase their resources, if required (and if money is available), or, conversely, demonstrate that belts need to be tightened in certain areas, or even act as a forewarning of higher profits and future tax liabilities.

So, what are the key areas firms need to focus on if they want to improve their agility?

Working capital

Cash flow and working capital represent two critical measures of a firm’s ability to meet its financial obligations and are the lifeblood of every business. Significant improvements to working capital can be made by focusing on:

• Accounts payable (central procurement, payment terms between competing suppliers, standardised terms across all suppliers),
• Accounts receivable (optimising client payment terms, dispute management to increase on-time payments and credit control procedures)
• Work in progress (accurate forecasting to manage cash flow and identify opportunities to reduce lead times).

Profitability

Not all clients are equal and not all work pays off, so it’s important that firms understand which clients produce the most profit for the firm. Does your management information provide an accurate picture of which clients create the highest profit margin and those that generate losses? The outcome of that analysis will provide a clear understanding of which clients your firm should do more or less business with.

Another threat to profitability comes from ‘scope creep’, in which the scope of services expands beyond the initial engagement. Firms must have processes to manage scope creep, including getting the original fee quotation right, monitoring the progress of all assignments, having timely communications with clients where potential overruns are identified and documenting agreed variations to ensure fees for additional services are recoverable.

Overheads

It’s also important to keep tight control of overheads and question expenditure, particularly in areas of rent and premises costs, and to review charge-out rates and ensure any fixed fee services, such as conveyancing, accurately reflect the total cost of work done.

We can assist firms and individual partners with effectively managing their financial responsibilities, working in-house with finance teams or individuals. We can also provide training for individual partners, or with the partnership as a whole, to ensure everyone has a full understanding of the relevant financial information.