Outcomes focused regulation has pushed financial management right to the top of the compliance agenda. The Code of Conduct makes it very clear that all firms must achieve financial stability by maintaining systems and controls to monitor the numbers, and ‘take steps to deal with issues identified’ (Outcome 7(4)).
The Code goes on further to say that firms are required to report to the SRA promptly when there are material changes to the business, ‘including serious financial difficulty’ (Outcome 10(3)). This is not just a COLP, COFA or even partner duty. It applies to everyone in the business.
Given the high profile firm failures of the past few years, it is no wonder that the SRA views financial instability as one of the key risks to firms, clients and the profession as a whole.
Who is responsible?
Everyone in the firm has a part to play – this is the mantra of the Code of Conduct. There should of course be one or more senior people (e.g. COLP, COFA, management team) with overall financial responsibility. Ultimately though, as with all other compliance issues, the entity itself (along with its ‘managers’ and owners) is accountable to the regulator.
What should we be doing?
Making financial management a top priority is clearly the first step. Senior management must make everyone aware that, after all is said and done, the firm is a business, and that it is everybody’s responsibility to help achieve financial goals. This should be a part of your internal training and induction programme.
Practically speaking, you should set some financial priorities such as:
- getting costs information right on every file – you do not want to have to write off costs due to poorly worded retainers, or fee earners being embarrassed to raise the issue of money with their clients.
- Get money on account on every privately paying case. It’s not difficult, and most clients will expect to have to open their wallets when they agree to instruct.
- Don’t be a disbursement lender – the client should pay for disbursements when they fall due. If that is not possible, look into disbursement funding arrangements.
- Manage fee earners’ work loads and efficiency – the longer work is in progress, the worse the cash position. Volume conveyancing and personal injury practices know the importance of efficiency where margins are tight.
- If time recording on a matter, make sure it is an accurate reflection, not just what the fee earner thinks is reasonable.
- Scrutinise all write offs at senior management level – if the time spent was justified then the client should have to pay, full stop. Which departments or fee earners are routinely requesting write offs?
- Bill monthly wherever possible. For privately paying cases likely to last over 2 months this should be the norm. As long as you have the conversation with the client at the outset, they are not likely to object.
- Chase late payments unashamedly. You have done the work and should be paid.
- Monitor the cash position on a micro and macro level – where are the pinch points (VAT, corporation tax, payroll, rent?) and what short term financing arrangements are in place? Are there any financial ‘cliff edges’ in sight? Do we need to think about cash for investment (IT, staffing)?
Run regular reports on all of the above – because ‘what gets measured gets managed’.
Audit trail
Be sure to establish an audit trail for all financial management steps taken, for example:
- risk management minutes
- board minutes
- email exchanges with, and reports to, financial advisors and banks
- training delivered to the firm
We understand that the SRA is likely to repeat its financial stability monitoring exercise. Last time this took the form of a questionnaire to 2,000 firms with follow-up visits where necessary. You do not want to be in the position of doing all of the right things, and not being able to prove it.
SRA guidance
Don’t forget the SRA’s good/bad financial behaviour checklist, which provides a good insight into the regulator’s thinking:
“Poor behaviours
- Drawings exceeding net profits
- High borrowing to net asset ratios
- Increasing firm indebtedness by maintaining drawing levels
- Firms controlled by an “inner circle” of senior management
- Key financial information not shared with “rank and file” partners
- Payments made to partners irrespective of “cash at the bank”
- All net profits drawn, no “reserve capital pot” retained
- Short-term borrowings to fund partners’ tax bills
- VAT receipts used as “cash received” resulting in further borrowings to fund VAT due to HMRC
- Partners out of touch with office account bank balances
- Heavy dependence on high overdraft borrowings
Good behaviours
- All partners regularly receive full financial information including office account bank balances
- Drawings are linked to cash collection targets and do not exceed net profits
- Provision is made to fund partners’ tax from income received
- A capital element is retained from profit, and a capital reserve account built up
- Premises costs are contained
- Profitability levels are tested and unprofitable work is (properly) dropped”
(Source: http://www.sra.org.uk/solicitors/handbook/code/part3/rule7/resources.page)
