How can SME law firms get on top of finances in 2021?
Mike Stevenson, managing director at Iceberg, says this ongoing lockdown will mean further challenges on the horizon in terms of balancing the books and trying to plan for an uncertain future.
January 2021 is finally behind us, and the first month of the third national lockdown has drawn to a close. However, with no clear end in sight, many of us are preparing for several more weeks spent at home, and a return to even part-time office working life is looking unlikely for the foreseeable.
In the legal world, this ongoing lockdown will mean further challenges on the horizon in terms of balancing the books and trying to plan for an uncertain future. Here are our top tips for a smooth ride in 2021, whatever the future holds.
- Start an open dialogue with fee earners
Now is the time to work closely with fee earners to ensure you work as efficiently together as possible – full transparency is a great place to start.
Set up meetings and openly discuss any financing challenges the firm is facing – this will open a dialogue for others to help come up with solutions and improving processes. Fee earners need exposure to the work of the finance team so that they can understand the importance of ensuring fees are paid within the correct timeframe.
- Think carefully about deferred tax payments
Late last year, the Insolvency Act 1986 Regulations 2020 came into force. This means that HMRC will now take priority alongside preferential unsecured creditors in the event of insolvency, ranking only behind fixed charge security and liquidation/administration expenses and ahead of the floating charge holders, unsecured creditors and shareholders.
As a result, many banks will be reviewing their lending structures to take into account any money owed to HMRC that would take precedence over their charges in the event of insolvency.
Some lenders may now also ask for proof that preferred priority taxes are paid up to date. If they’re not, it’s possible that a corresponding reduction in the bank’s facilities may be required.
A solution available to law firms is to explore a range of financing options available to pay their taxes. Taking out an unsecured tax loan will not adversely impact on any floating charge security held by a firm in the way that owing money to HMRC as a Preferred Creditor would.
- Plan carefully for PII
At the end of Q1, firms will also need to plan for their professional indemnity insurance (PII) renewals. Over the last 18-24 months, PII premiums for law firms in England and Wales have increased and are estimated to cost between 15 and 20% more than last year.
The cost of PII can be significant and put additional pressure on a firm’s cashflow – at a time where the economy is already unstable and putting pressure on earnings. In order to ensure they get the right quote, planning is key. Managers should ensure they provide as much information as possible to their chosen broker so that the underwriter has all the information required to comfortably evaluate the risk, pre-empting questions the underwriter might have where possible and providing reports and accounts with the original submission. It’s also important to showcase how the firm has managed during the pandemic and any changes that were implemented to manage the current climate.
In terms of managing the costs of PII, firms can have a look at financing options, some of which are specifically designed to help law firms meet the cost of PII premiums by spreading payments over the period of cover.
- Think about the long-term picture
No one yet knows what the post Covid-19 world will look like, and how different it will be to the one we left behind in March 2019. The most important thing, at the moment, is for businesses to prepare for all scenarios and to put building long-term financial stability at the top of the agenda.
If you’ve made use of the Coronavirus Business Interruption Loan Scheme (CBILS) and have money in the bank, a priority is on figuring out how to balance short-term financing needs with making provisions for the long-term.
Law firms might want to avoid building a legacy of servicing long-term debt. Because CBILS loans are designed to be repaid over a long period, more short-term financing solutions might be better suited for expenses due in less than 12 months.