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MINIMIZING RISK OF CREDIT CRUNCH FOR LAWYERS

Even though the profits and cash flows generated from the conveyancing department has been regarded as cash cows in some countries, this has very little relavance to many of our law firms in Sri Lanka. However, this has a knock- on effect on other departments such as family and probate. There is also a downturn in the number of commercial deals being completed. It is however clearly apparent that this is not due to lack of potential clients, but because of the difficulties in obtaining funding to finance the deals. This means that the transactions are taking much longer to complete or if they are completed at all, the fee and cash flows have declined by a significant margin.
Nevertheless, it is acceptable that the troubles we have in the current climate could be compensated by a rise in litigation and insolvency work. However, even though the lawyers in these areas seem to be busy, it is still difficult to see the outcome in the bills delivered and cash collected without delay. The inherent nature in these types of work is that it takes a longer time to be able to deliver bills and to get paid if that stage is reached at all.

And in the facts that the clients will be more likely to delay or default on payment of fees, then it becomes clear that increased lock up is the result and the key concern for many lawyers at present. The attitude of the banks to this type of phenomenon is fairly uniform. For them, cost of capital has increased and they are attempting to renegotiate their terms to make it more expensive to borrow money, and they are certainly against lending to firms that enable partners to maintain their drawings level without any distruption.The one bargaining tool that most law firms have when it comes to agreeing deals with the banks is the strength of their clients’ account. Clients’ balances may have fallen due to reduced activity but they are more important than ever to the banks and as a result, firms should use this point as an advantage in dealing with the banks and other financial institutions.

Owing to the facts mentioned above coupled with redundancies, pay cuts, failure of some firms is inevitable resulting in a lot of mergers and acquisitions in this area, which is already taking place in some parts of the world and the UK.
It is vital in this current climate to have a robust management information system in place. The regular production of accurate management information is more important than ever as this is their early warning system. The information produced must contain cash flow forecasts and this has to be done at least on a monthly basis in order to show future cash requirements of the business. Cash flow requirements need to be calculated in advance so that firms are aware of the peaks and troughs allowing them to make decisions in terms of cost reduction and further finances.

This will allow the firms to work with the lenders. The advance notice certainly helps them and it gives them more confidence to support the firms consistently. They are much less likely to help if they receive a last minute request. The bankers are being quite harsh with many businesses in the current climate particularly lawyers and solicitors. However the funding institutions are much more likely to support the legal practitioners if they can get them on side with what the firms are trying to do. If it’s not done so already, it would be a good idea to arrange a meeting with your bank to outline your business plan and forecasts to show them how you think the downturn will affect you and how you propose to deal with the issues. It is also important to monitor activity levels and new instructions. Performing this exercise will help with preparing the forecasts. At the same time, it will also show how busy the fee earners are. Monitoring the level of new instructions will also indicate whether there might be a fall in activity during the next few months and will therefore help you to make appropriate decisions in terms of how many fee earners are required.
It is also of paramount importance that all fee earners in all departments should record all of their non- chargeable and chargeable time by activities identified by a matter code irrespective of the fixed fee work such as conveyancing so that profitability can be calculated by job and department. It also means that the fee earners tend to perform their job more efficiently knowing that they will be judged on each matter. Now, it is an absolute necessity. The firms need to know how much time is being spent by fee earners on chargeable and non chargeable duties and how many of them are efficient and effective. Equally important is to know the recovery rate for each matter, fee earner and department. This information will help the firms to make the right decisions in effectively managing their practice. At a higher level, if you know the benchmarks, it will allow them to make strategic decisions about the future of the practice in terms of reducing costs in under-performing departments, seeking additional investments in certain departments and even stopping performing certain types of work.
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