Four strategies to manage cash in a year of transition

Managing cash is crucial as the furlough comes to an end, and law firms make the transition back to normal. Mike Stevenson at Iceberg presents four things to keep in mind for the next few months.

There is no doubt that the pandemic forced the legal industry to build resilience, and that many of those learnings will continue to be beneficial for the long term. When the first lockdown was announced, finding ways to improve processes in order to maximise stability and efficiency was a crucial focus for the industry. As we begin the final quarter of 2021, there are four key elements for firms to consider

Borrow short to pay short

If law firms have long-term cash from the Coronavirus Business Interruption Loan Scheme (CBILS) or Bounce Back Loan Scheme (BBLS) in their coffers, they should consider holding on to this in order to build stability and resilience over time. When it comes to financing shorter-term liabilities, they can look at other borrowing options that are tailored to those specific needs.

Invest time in choosing the right Professional Indemnity Insurance funding

While many firms will have already made arrangements for Professional Indemnity Insurance (PII), others will be facing renewal in March. As a result of the increase in cost of PII, law firms should – more than ever – invest time in researching funding options that are available, rather than simply signing the pay-by-instalment box on their offer of PII cover. This will allow them to find cheaper, more flexible funding solutions that are tailored to their unique needs.

Understand insolvency regulations

Firms should engage with their clearing banks to establish how their banking facilities may be affected by the new regulations regarding preferential debts in an insolvency, so they do not get caught out further down the line when applying for credit.

Late last year, the Insolvency Act 1986 (HMRC Debts: Priority on Insolvency) Regulations 2020 came into effect.  This had been set out in the Finance Act 2018, well before any mention of Covid came into the public domain. The Act partially restores the Crown’s status as a preferential creditor in the order of distribution in insolvency proceedings.

The current rules move HMRC to take priority alongside preferential creditors in an insolvent business, ranking only behind fixed charge security and liquidation/administration expenses, but ahead of the floating charge holders, unsecured creditors and shareholders. Law firms need to be aware of this as it could impact the value that their clearing bank puts on floating charge security.

Fix an accountancy reporting date

Law firms should note that, under current proposals, unincorporated businesses  – partnerships, and sole traders, amongst others – would be required to fix the end date of the 12 months from which they calculate profits to either 31 March or 5 April.

Aligning the reporting date with the tax year would mean that profits that arise in each reporting year would be allocated to that tax year. Currently, profits are taxed for the year in which the business’ accounting period ends. Many partnerships will end their accounting period on 30 April, allowing them 11 months’ grace. For such firms, the proposals would effectively allocate 23 months of profits – minus any overlap relief – to the transition year.