We have read recently that there are the first signs of “green shoots” and the recession may be approaching the bottom. How does this fit with experience in the professional marketplace?
Over the last six months we have seen the larger to mid-sized legal firms engaging in restructuring and redundancies. This follows similar action 12 to 18 months ago by smaller law firms, accountancy firms and professionals engaged in the property business. Most professional firms will now have gone through a painful exercise to match capacity and expertise to reduced volumes.
The mid-tier law firms have been perhaps the slowest to react. In some ways this is understandable given their efforts to build up teams and capabilities over the last ten years. It has been a painful decision for many of these firms to discard this investment in their futures. However most professional practices have been forced by financial necessity to implement cuts.
This begs the question as to whether corrective action was taken in time and to what extent professional firms have suffered financial damage as a result?
Many smaller firms in all professions have actually found themselves with solvency issues and a growing number are actually failing. For example some commentators anticipate that perhaps 1,000 law firms will not survive the recession.
However a greater number of professional firms will have found themselves in the position where profits have dropped, cash flow declined, borrowing lines have been closed and they still have legacy issues from the boom – not least deferred tax bills.
The banks have generally been supportive of firms but on the whole have been unwilling to increase exposure. A consistent message has been that if partners have paid themselves money that has not been earned – then this is an equity and not a bank issue. There have been rounds of recapitalisations either through new money or cuts in drawings.
This trend has been exacerbated by declines in house prices and the removal of equity loans in the market place. Equity partnership has a new meaning in today’s conditions. Growing numbers of equity partners have been asked to personally fund their firms. More appear to be asking the question as to whether they are going to put good money after bad. This feature of the recession will encourage moves of partners to stronger firms. It will accelerate the divide between the winners and the losers of the future.
One piece of good news is that the market for secondary debt is improving with new sources becoming available. However the supply of funding products for WIP, fixed assets and to pay tax by instalments is probably still 75% down on a year ago. For many professional practices this will continue to create stress on core bank facilities given challenging trading performances.
Also too many firms appear to be taking on additional and expensive debt to buy themselves time. The danger is that this new funding is burned away without businesses using the headroom and time to restore profitability and cash flow. This is a real danger sign and is found in all firms which have encountered solvency issues.
So where does this leave professional businesses as it seems we might just be seeing the worst?
On a strategic basis you must develop a business plan linked into robust financial forecasts which are convincing. A failure to do this can lead to a collective loss of nerve. Whilst most plans do not survive contact with reality, firms need to persuade partners, staff, clients and their banks to stick with them. Times are tough now but the future must hold promise.
Firms which can achieve this will strengthen their position and emerge from the recession in an improved competitive position.
Strategies need to include programmes for organic improvement and realistic merger options.
The most overlooked aspect is funding requirements. Have you access to the cash you need to drive forward and pay for your strategy? Do you have sufficient financial firepower to deliver and reserves in place to staunch losses when (inevitably) something goes wrong? If you are not confident that you can positively answer these questions then experience suggests your firm risks solvency problems.
On a more practical level, here are a few pointers for Managing
Partners:
- Make sure you have planned your financial improvements and can track if you are on course. Critically you will need to match capacity to work volumes.
- In most cases this will involve a dramatic improvement in time recording. The cultural changes are not to be underestimated.
- Cash management is king and the devil is in the detail. Become involved on a very hands on basis – you will learn a lot.
- Look carefully at your client base and discard the bottom 5% to 10%. Don’t hang on to loss making business just to keep people in work.
- Don’t allow yourself to get tied up in delays and committee. Take fast decisions and if necessary get empowered to do so. Delay equals cash burn.
- Improve your management reporting. Get on top of things on a daily basis.
- Stop spending money. There is a difference between delaying payments and cutting out costs.
- Talk to your people. Try to avoid newsletters and emails. Walk the floor, explain the plan, and show leadership. Get involved. Communicate. Don’t do “the bunker”.
- Take a few tough decisions. You may be surprised that many of these are actually welcomed by the troops!
Times are still tough. More businesses suffer problems as we come out of a recession than when we are on the way down. So play it smart and give your firm the best chance to thrive in the future.