Improving your working-capital management

From poor cash control that allows money to walk out of the door, to inconsistent billing policies that can easily be ignored, improving working-capital management requires time, energy and planning.

Working capital is key to any commercial business, but none more so than a professional-services firm. In an environment where a large proportion of the costs are effectively fixed, such as people costs, partner compensation, space costs and professional-liability expenses, to name but a few, there needs to be a focus on making sure that not only enough cash comes through the door in terms of bills being paid, but that not too much cash leaves the door through unnecessary expenses. In the law-firm world, cash really is king.

This article examines what can be done to make sure that the income cycle – from taking on a new client or matter, recording the time, billing as much of that time as possible, to collecting all the cash – is as efficient as possible. It then goes on to investigate what can be done to make sure that you are spending your money as wisely as possible. It is not designed to provide high-level, strategic-management talk. Instead, it gives practical insights into how to, as the title suggests, improve your working-capital management. It also looks at how to overcome the inevitable barriers you will face, as well as how to achieve buy in for changes you may suggest.

The income cycle is where the real ‘big bucks’ lie. This article will make many suggestions for cutting costs, but just one decent step to improving efficiency in your income cycle can outweigh the achievements of twenty great cost-saving ideas.

Make the income cycle as simple as possible

We are operating in a world of increasing complexity. If you need an example of this, look no further than today’s money-laundering regulations. This means that we need to constantly be on our toes in finding new and easier ways of doing things. The income cycle needs to be as simple and effective as possible. This means avoiding red tape when opening a new client account. In the same way, good technology is essential to ensure a quick and simple process for opening a new matter for that client. Conflict clearance also needs to be easy. The last thing you want is lots of people recording time on a matter that then needs to be written off because the conflict clearance is not given.

The time-recording system needs to be reliable and easy to understand. Make sure your fee earners are able to record time from any PC anywhere in the world. Make sure that the time they input flows into the billing system as quickly as possible. Also ensure that partners and other fee earners and secretaries have online access via the intranet to up-to-date work in progress and accounts-receivable balances on clients and matters. Fee earners should not have to ask the accounts department for such information – that’s inefficient for both parties.

When the matter is ready for billing, make sure that billing is easy for the fee earner and does not seem a chore. Many firms these days use fee-earner-billing desktops, but if you do not, make sure that draft bills are quick and easy to obtain. They should be capable of being downloaded from the firm’s intranet site straight to the desktop. Consider introducing the concept of summarised draft bills. After all, does a partner always need to wade through pages of time and disbursement narratives?

A summarised draft bill can just give the total work-in-progress figures and a summary of hours and value by person, as well as a summary of disbursement value by disbursement type.

When the matter has been billed, it is helpful for partners to have a clear and simple way of telling the accounts department whether they can chase that bill for payment in the normal way. Again, the accounts department needs to be proactive and assist the partner in making sure payment is received quickly.

You need partner ‘champions’

This may not be easy, but find a few partners who are really good at the income cycle, engaging commercially with clients, recording time daily, billing monthly and collecting the cash well within thirty days. If you can find anybody like that, make sure they tell other partners all about it, probably at partner meetings. Partners listen to partners, and if you do have a few champions, it can be extremely effective.

Advertise best practice

Well marketed best practice is a key factor. Best practice encompasses the whole income cycle and should be advertised via clear best-practice notes, available on the firm’s intranet. Some of the issues they should cover, include:

At engagement, ensure the client credit is worthy. If in doubt, obtain money on account;
Check compliance with all the regulatory issues, such as conflict checking and money-laundering clearance;
Ensure there is a client-engagement letter for each and every matter. Where can standard-engagement-letter documents be found and what needs to be covered in the letter? Make sure that the accounts department receive a copy so that they can see if any special billing arrangements exist;
Make sure the firm’s terms and conditions are sent out to all existing clients if they have not had them, and to all new clients. If discounts are being given, ensure that they are properly authorised;
When the work is being done, all time, including non-billable and absence time, should be recorded on a daily basis. Is enough time being recorded? If in doubt, the time should be recorded, even if you may not bill it. Let the billing partner make that decision. Make sure full and accurate time narratives are given. Partners have a duty to keep an eye on the time being recorded on a matter. They should be giving their clients at least monthly updates on the level of work in progress. They need to ensure that time is not being padded and that the right people are working on the matter;
Try and remove partners from the operational side of the billing process. It is an inefficient use of their time and, frankly, they are not very good at it. Consider the concept of billing managers. These could be senior associates or secretaries, and their role is to make sure the billing process runs smoothly;
Bill matters monthly, even if it is a transaction where the firm will not be paid until the matter is complete. Clients much prefer monthly bills because they let them know exactly where they are in terms of their obligations. Bill as much time as possible, and, if time is being written off, make sure there is a clear authorisation process. Try and bill premiums, especially when the deal has been successful and you have done a good job;
Make sure that all time and disbursements have been billed. Have the billing manager ring round all the fee earners to make sure all their time is in. They should also ring round all the third parties involved in the matter and ask them to either bill immediately or tell them how much they are going to bill. The accounts department should also play a role in ensuring that all internal disbursements such as copying are allowed for on the bill. Of course, all of this is even more vital if it is a final bill. In my opinion, there is nothing more frustrating than having to write off third-party disbursements because of inefficiencies in the system, as it is literally giving money away. I always try and persuade the partner to send a late-disbursement-only bill if this happens, but I’m rarely successful;
In the cash-collection stage, it is always good practice for the partner to call the client just before the bill goes out to make sure they agree to the amount on the bill. Such agreement clearly helps ensure that the client does not receive any nasty shocks, thus clearing the way for a quick payment. It is also good practice for a secretary to call the client’s secretary a week or so after the bill has gone out to make sure the bill has been received. Lastly, on the cash-collection side, always let the accounts department do the bill chasing; they have the resources and experience to do this efficiently and professionally.

Other ideas to consider on the income cycle:

Do you punish non-compliance? For example, should partners be paid if they do not record their time adequately, or if they constantly renege on promises regarding billing time or collecting cash?
Fee databases are a key tool when engaging with a client. They allow a partner to look at other matters similar in scope to the one they are potentially taking on to see how much it costs in terms of time, and what the profile of fee earners working on the matter was. It is important for resource planning and for giving fee estimates and agreed or fixed fees.
Partners and other fee earners, especially ‘polite English’ ones, are notoriously bad at negotiating with clients. They need proper training in negotiation skills to allow them to agree commercial fees at the outset, to be comfortable giving a client bad news during the matter if, for example, the costs have risen, to agree good commercial bills with a premium when the time comes and to be effective at making sure the client pays the bill quickly.

Reviewing the cost base – the war on waste

The other side of the ‘cash is king’ coin are the costs. Therefore, as a project, a good review of the cost base is vital. When I talk about costs in this regard, I mean controllable costs. It is pointless, for this purpose anyway, to review non-controllable costs, such as space, partner, professional liability, depreciation and head-office recharges. For the purposes of any war-on-waste project, you may want to ignore strategic costs such as marketing and legal education. It is also important to say that the review should look for ideas to increase recharges to clients as well as cost savings.

In my experience, the best way to go about this project is to involve all the experts as much as possible. I call them the budget holders, and that means the people responsible for the day-to-day operational costs. Have an initial meeting with them to explain the concept of war on waste and what it is trying to achieve. Give them a pro-forma form with space for them to come up with their cost-saving idea and tell them what the deadlines are. Ask them to also consider any attributable costs, such as new software required, and remind them that quality is still vital. For example, there is little point saving £7,000 per annum on cheaper paper if it folds when it prints. Tell them to ‘think outside the box’ when they are coming up with ideas and to consider other areas apart from their own. Also make it clear that any ideas they have are confidential; this always helps when they think their peer in another department is a complete waste of money.

A week or so after the initial meeting, start to meet each expert individually and discuss their ideas. In that meeting, you should decide what the most reasonable ideas are, and ask the expert for action plans to achieve the savings. You should take any low-hanging fruit, as well as taking the biggest ones first, in terms of cost savings or additional recharges. This sounds a little contradictory, so it is worth drawing a two-by-two grid and concentrating initially on the ideas with the highest benefit and the highest ease of implementation.

It is also vital that you carry on meeting the experts on a regular basis to discuss the implementation of their ideas. In terms of low-hanging fruit, there are several things to consider:

Are you charging enough for disbursements in general, for example, copying? You need to perform good due diligence here, but the impact financially can be significant when you consider the volumes;
Are you charging for disbursements such as reprographic finishing and binding, and the cost of, say, A4 ring binders? These days, more firms are charging for printing and scanning;
Are you recharging clients for management charges invoiced from your vendors? For example, if your in-house travel agent charges you quarterly as a lump sum, should they instead bill an element of their management charge to each separate invoice? That way, the client pays their fair share. In this case, you need to ere on the side of caution to make sure the client is not charged more than you are paying;
Examine the recharge culture and focus on the culprits. For example, if there are certain people who always charge their copying to the firm and not clients, ask them why. Try and change the culture to be one of charging as many costs as reasonable to clients. Make it clear that you take it seriously and watch what people spend and recharge for. It is also vital that you have clear and well marketed finance policies that cover exactly what people can claim expenses for. Be strict, and be seen to be strict.

Other areas to consider in the war on waste that are perhaps not as ‘low hanging’ are:

Dues and memberships – if you pay for the cost of the Law Society memberships for people in other offices, recharge the other offices. Make sure that the benefit exceeds the cost for the more expensive association memberships;
Ensure you charge enough for in-house catering;
Make sure you have an upper limit on what people can spend on evening meals when they are
working late;
Partner lunches – do you need them every day? Are they achieving their purpose?
Travel policies may also be too generous. For example, partners do not really need to travel business class to Europe. Equally, people should not be refusing good deals
on particular airlines because of a personal preference for, say, British Airways. Nor should people reject Gatwick to Newark for Heathrow to JFK, when the former is far cheaper. There should also be upper limits on hotel tariffs in each major city in the world. And, finally, all travel should be properly approved;
You may be incurring unnecessary costs in cab-waiting time. If you keep a cab waiting even five minutes there can be £10 on the meter before you have got in;
Computerised legal research – these days there are so many databases used that charging efficiently for all of them is becoming harder. Therefore, consider charging for your librarian’s time on an hourly basis;
You should use technology that makes it easy for people to charge for their land-line calls. Mobile-phone calls are very difficult to recharge for, so you need to consider receiving daily feeds of mobile calls made from your mobile supplier and passing them into an easy-to-use database for people to recharge the day after making the call;
Silver pens emblazoned with your logo are nice but not necessary. Plain pens or even pencils may well be sufficient;
Cleaning, stationery and insurance: ensure your cleaners are efficient and that there are not too many. Establish inventory control over stationery and avoid having lots of stationery cupboards all over the office for people to help themselves from. Also ensure you tender enough for your local insurance;
Vendor relationships: constantly ask for reductions in vendor terms, for example, cab-booking fees and meal-delivery fees. Build up good professional relationships with your vendors and, always remember, if you don’t ask you don’t get.

In the war on waste, I have hopefully made it clear that lots of small cost savings and recharge ideas can add up to a significant overall amount to the bottom line. In terms of benchmarking, you should certainly be able to see total increased recharges and lower costs of at least ten per cent of controllable costs.

Overcoming barriers to change and achieving buy in

Whether you are trying to make sure client-engagement letters are always sent out or you are trying to change the recharge culture, you are inevitably going to meet resistance along the way. How do you achieve the buy in you need?

Always have a senior partner as a project champion or sponsor. For example, if you are trying to make sure all fee earners complete online money-laundering training, it helps if the message to the fee earners is coming from the top. It also helps to have partner champions who coach other partners and fee earners.

Too many e-mails reminding people about financial policies can be counter productive. With the best will in the world, people ignore e-mails very easily, especially on subjects they perceive to be nagging. Try and use a hard-copy medium to send messages, for example, a weekly newsletter that carries lots of other more ‘interesting’ news.

Use the managing partner to send messages for you. Inevitably, people will take far more notice of an e-mail from the managing partner regarding adherence to policies than they will from somebody from the accounts department, especially when the method is used sparingly.

Try and attend regular departmental meetings. These are not only useful forums to hear about how deals are progressing, but you can also drip-feed messages regarding financial policies.

Secretaries can be underrated carriers of messages. Use secretaries as much as possible to convey messages for you, for example, in ensuring copying is recharged to clients instead of the firm. They will talk to not only other secretaries, but also to lots of fee earners too.

Taking control

It is sometimes felt by finance directors that much of the cash generation and cost reduction is outside their control. Hopefully, I have shown in this article that in actual fact there are a number of things that can be done internally within the firm to really improve the bottom-line figures. With a professional culture, strict adherence to the clear policies, good commercial awareness by the partners and other fee earners, good technology, and, lastly, support from the top, you can really make improvements to your working-capital management.

Anthony Bash is head of finance at Weil, Gotshal & Manges in London. He can be contacted at anthony.bash@weil.com.