Opinion: It’s not rocket science

Discipline and persistence are vital when striving to improve working-capital management. By Charlotte Balfry, finance director of Berwin Leighton Paisner.

Management of working capital is not rocket science.

On the contrary, it calls for quite straightforward skills. High among these are refusing to be satisfied with the status quo and always striving to improve, so discipline and persistence are essential.

Working-capital management within a law firm is more complex than many other industries due to the personal relationship at the heart of the services provided and the dependence on individual lawyers to manage those relationships. These effect both work in progress (WIP) management (the speed with which services provided are converted into invoices) and debtor management (the speed with which those bills are paid). Finding ways to engage the lawyers to do this better is key to improving working-capital management. There are various components that support good working-capital management.

Answer the question, why?

It is important to ensure that lawyers understand the impact of good working-capital management on the firm’s overall financial position. Most lawyers respond better if they understand the importance at an intellectual level. Achieving this comes down

to training and explanation. Providing relevant examples that highlight the impact of poor working-capital management in actual monetary terms is one useful way to get the message across. Business games (with prizes) also work well. However, while this may mean that that lawyers understand why good working-capital management is important, it does not always guarantee that they will have the inclination and/or ability to improve their own performance.

Make sure lawyers understand and are trained in best practice.

To ensure that lawyers understand good practice, those involved in client billing and relationship management must have intensive training in fee negotiation and management of client working capital. The HR and finance teams need to work closely on the course content to ensure that messages are clear and consistent.

Mentoring by more senior lawyers with a good track record in this area is also very useful. Good management of WIP and debtors starts early in the revenue cycle with the initial set up of the client relationship.

If the basis and frequency of billing and payment are agreed at the start of the relationship, it is much more likely that the management of WIP and debtors will be straightforward.

It is well known that prompt billing during and at the end of an assignment will generally lead to better recovery rates, more informative bills and faster payment. Remember to check credit worthiness with the contracting entity at the start of a relationship and on an ongoing basis. And ensure that any queries relating to an invoice are dealt with promptly, thus keeping the issue at the forefront of the client’s, and the firm’s, mind.

Carrots and sticks

Set stretching but achievable targets, preferably tied to some reward or penalty, and make sure they are well communicated. Targets relating to WIP levels, billing or cash collections by firm, practice group or individual can be very powerful, particularly if tied to a monetary incentive, such as accelerated or delayed payments of drawings or distributions. The targets should be clearly communicated and regular updates of actual performance should be provided during the period to which the targets relate. It is also useful for the management of working capital to be included as a component of a lawyer’s appraisal process.

Keep it simple

Make the process of managing working capital as simple as possible. The easier it is to bill and resolve queries, the less this is a barrier to good working-capital management. That means ensuring that systems and processes support users effectively, that procedures are clear, well documented and readily available, and that bespoke support is available for complex arrangements.

Monitor and manage

Be disciplined in monitoring performance and where it is not satisfactory, be prompt in taking corrective action. There need to be people within the organisation – whether in finance itself, in the business units or in management positions – who remind lawyers of the importance of billing and debt collection on a frequent basis and provide appropriate support if necessary.

This brings us back to our start point – discipline and persistence are key and make the biggest difference between average working-capital management and great working-capital management.

Charlotte Balfry is finance director of Berwin Leighton Paisner. She can be contacted at Charlotte.Balfry@blplaw.com.