How to improve your cash flow and profitability

1. How to improve your cash flow and profitability - by working smarter, not harder

2. Who feels like this? PETER SCOTT CONSULTING

3. The scope of our seminar today • Using financial analysis to get to grips with partner underperformance and big gorillas • Maximising your cash flow • How much more profit do you want to earn? • Constructing your action plans PETER SCOTT CONSULTING

4. Your challenges? • To pay off the bank overdraft • To pay out last year’s profits • Not to have to put in more capital • To pay out retiring partners • To improve PEP by [ ]% • Others? PETER SCOTT CONSULTING

5. Make the most of what you have Work smarter, not harder PETER SCOTT CONSULTING

6. Your partners • Their performance • Their behaviour PETER SCOTT CONSULTING

7. “Heavyweight gorilla” “You can’t manage me.I’m a big biller!” PETER SCOTT CONSULTING

8. “Do own thing” “That’s a great idea… …for the rest of you” PETER SCOTT CONSULTING

9. “Winding down” “Ahh….only 5 more years to go” PETER SCOTT CONSULTING

10. Accountability “We have no room for those who put their own personal agenda ahead of the interests of the clients or the office” David Maister’s “Predictive package” PETER SCOTT CONSULTING

11. Partner accountability As a partner I fully accept and agree that each partner must be accountable to every other partner for his or her actions because our firm will only be able to make the progress we all want it to make to achieve our full potential, if each of us, as our part of the bargain as individual partners, behaves in relation to the firm, its clients and everyone in the firm, in a manner consistent with the principles and way in which we have agreed the firm is to be run, and on the basis that each partner puts the interests of the firm before any personal interests or agendas. PETER SCOTT CONSULTING

12. Partner accountability For example and without limiting in any way my agreement to the above overriding obligation, I undertake to support in the fullest possible way: • The implementation of all decisions made by our partnership • Those mandated with the onerous task of managing the firm; and • Every other partner in the firm as each endeavours to fulfil their respective roles in the firm. PETER SCOTT CONSULTING

13. Put the squeeze on your business PETER SCOTT CONSULTING

14. Avoid Financial Information Overload KEEP IT SIMPLE PETER SCOTT CONSULTING

15. Cash is king – effectivecash management

16. Cash flow – the process Instructions W.I.P Cash Debtors PETER SCOTT CONSULTING

17. Are you a squirrel? PETER SCOTT CONSULTING

18. How much is your ‘lock-up’? • “lock-up”(work done not paid for) = WIP at selling value + Unbilled disbursements + Unpaid bills (net of VAT) • “Excess lock-up” = WIP over 60 days + Debtors over 30 days PETER SCOTT CONSULTING

19. Cash Flow – finding solutions Need a cash generation plan to focus on(in order of priority): • Partner accountability • How practice is to be financed • Forward cash position goals • Billing targets by person/group • Collection targets by person/group PETER SCOTT CONSULTING

20. Cash management Partners’ capital should not be for subsidising financial under performance PETER SCOTT CONSULTING

21. Financing of practice • Your working capital requirement? • How is it funded? • Partners’ fixed capital • Profit distribution policy • Current account balances PETER SCOTT CONSULTING

22. Taking instructions/risk management • You are providing clients with credit, but you are not being paid to take credit risk • Terms of business • Money on account • Disbursements PETER SCOTT CONSULTING

23. Work in Progress • Recorded time - daily • Aged WIP • Review all matters - with 60+ days WIP - where no bills for 60+ days • Billing targets for each person/group PETER SCOTT CONSULTING

24. Debtors • Cash collection targets • Review all unpaid bills over 60 days • Use your credit control system • Link cash collection to distributions of profit PETER SCOTT CONSULTING

25. Benchmarks (= our new lock-uptargets) • WIP – no more than 45 days average • Debtors – no more than 45 days average • Lock-up – 90 days maximum • How much working capital would a one month reduction in your lock-up release? PETER SCOTT CONSULTING

26. Cash Management • Set minimum acceptable balance - £100k headroom to avoid o/d • Simplify cash flow - all figures to be gross (inc VAT etc) • Each month calculate cash needed to cover all outgoings for next 3 months (including partners’ drawings and distributions) • Calculate and broadcast weekly cash collection targets PETER SCOTT CONSULTING

27. Cash Management (2) • Report weekly on cash collection • Plan billing targets to generate cash to pay major outgoings (November bills to pay January tax) • Recognise consequences of deviations +/- £25k per week = +/- £325 per quarter • Payments to partners depend on cash collection PETER SCOTT CONSULTING

28. Cash collection targets (1) PETER SCOTT CONSULTING

29. Cash collection targets (2) PETER SCOTT CONSULTING

30. Effect of £25k per week variance PETER SCOTT CONSULTING

31. How to use your finance team to maximise cash management Is your team performing? PETER SCOTT CONSULTING

32. Cash management A final thought – Leave banking to bankers PETER SCOTT CONSULTING

33. Achieving maximum profitability – practical steps to make a real difference

34. Flabby law firms are failing To drive up revenue To drive down costs PETER SCOTT CONSULTING

35. Margins are being squeezed PETER SCOTT CONSULTING

36. Maximising profitability Work smarter – not harder How much more profit are you going to make next year? PETER SCOTT CONSULTING

37. Analyse your business PETER SCOTT CONSULTING

38. Profitability factors • Work types • Leverage • Clients • Pricing • Chargeable hours • Recovery rate • Major overheads PETER SCOTT CONSULTING

39. Overheads • Cost of: - people - premises - P I - I T • ZBB PETER SCOTT CONSULTING

40. Profitability – finding solutions Focus on : building the top line PETER SCOTT CONSULTING

41. Work types • Each work type as a % of overall turnover? • Net profit per equity partner for each work type/group? PETER SCOTT CONSULTING

42. Leverage For each work type /group • Net profit per equity partner? • Number of fee earners (including partners)? • Age/qualification of each fee earner (including partners)? • Delegation? PETER SCOTT CONSULTING

43. Clients • % of turnover represented by top 10% / 20% of clients (by billing value)? • Ditto for bottom 10% / 20%? • Net profit derived from each of above categories as a % of total? PETER SCOTT CONSULTING

44. Who is never guilty of the ‘Triple Whammies’? The TRIPLE WHAMMIES - • Under pricing • Under recording • Under recovering PETER SCOTT CONSULTING

45. Efficiency • Efficiency = Utilisation x Recovery • Utilisation = chargeable hours recorded divided by standard working hours (220 days x 7 hours = 1540) • Recovery = % of recorded time billed at selling price PETER SCOTT CONSULTING

46. PRICING PETER SCOTT CONSULTING

47. Pricing For each person/work type/group/client • Headline rates • Local comparables/competitiveness • Recovered rates • Latest rate changes • Value billing arrangements • Fixed fee work PETER SCOTT CONSULTING

48. If… • You have 30 fee earners • Each averaging 800 hours p.a • Increase rates by £10 p.h and fully recover • How much more revenue will you generatein a full year? PETER SCOTT CONSULTING

49. £10 p.h rate increase across the board will produce… £240K additional revenue PETER SCOTT CONSULTING

50. RECORDING CHARGEABLE TIME PETER SCOTT CONSULTING