Law Firm Profit and Loss Statement - Download as DOC by sff13096


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									                         KNOWSLEY MANAGEMENT SERVICES

                                    ‘Knowsley Park’, 1659 Mutton Falls Road
                                                       O’Connell, NSW 2795
                                                       DX 3120 BATHURST

                                              National Freecall 1800 621 270

                                                             Fax: (02) 6337 5000
                                          Writer’s direct e-mail:

Friday, 15 April 2011

All MPA Members

Meeting on cashflow…Menzies Hotel December 1

This meeting was well attended with 20 acceptances and five members who
had last minute things crop up.

Attendees were…Geraldine Daley, Alan Conolly, Peter Heazlewood, Hugh
Maccallum, Frank Windeyer, John Cox and Phil Thompson, Rick Schmidt,
Patrick Snowden, Tom Sherley, Doug Spencer, John Teague, Gavin Hanrahan
and Peter Kell, an especially welcome attendee after too long an absence!

To remind you…The topic was one dear to all our hearts..."Cashflow
planning...very topical with the influence of GST 1st quarter and the first Pay
as You Go payment (usually coming as many taxpayers are still attending to
their balance tax from last year) affecting many of your clients... together with a
slight general slowing in many areas of the economy.

Too many firms are still far too reactive to poor cashflow...confusing the
symptoms with an underlying poor performance on profitability...often not the
case at all.

We'll look at the factors affecting a practice's working capital needs and the
elements that need to go into a proper cashflow model...and briefly discuss an
effective Sources and Application of Funds statement to give you accurate
information on where the funds in your practice have come from and gone to in
any given period."
I made some notes, which I will share with you in the hope that you find at least
some parts of some benefit…

Why does a practice need Finance?  To purchase assets  To provide
Working capital…

Working capital is the funding needed for the day to day operations of the
firm…to meet overheads…pay disbursements for clients…pay partners

Yes some clients will pay the firm some cash but…working capital is needed to
cover the gap between expenditure on the three items above and collection.

Technically it's the difference between "current assets" and "current liabilities".

Current assets… Cash  Some of the WIP (collectable within twelve
months)  Most of the debtors…

Current Liabilities… Creditors        Overdraft     Other liabilities due within
twelve months…

Where can Working Capital come from?

 Undrawn profits

 Loans from partners…reinvested!

 External long-term borrowings (outside twelve months so not a current

Overdrafts are supposed to be for funding between peaks and troughs in
cashflow…not for all your working capital needs.

Fully drawn advances etc are used for part of your core working capital needs.

Banks expect that because OD's are supposed to be for peaks and troughs
they will come into credit at least once in each cycle…(I hear distant
laughter!!)…if they don't you probably need more working capital!!

How much working capital does a practice need?

It will depend on practice size, the average length of your matters and how
efficiently you bill and collect.

You need good systems to work it out for yourself because not understanding
the needs can cause panic and general unease and make last minute,
unsatisfactory, requests to the bake for extra funding inevitable.

The amount of working capital needed will increase as your business does so a
greater need is not per se evidence of problems in the business.
In an expanding and developing practice the situation where you are self-
funded may never be reached!

Many profitable businesses run into problems as a result of running out of

The total amount of working capital you have borrowed or invested will get
bigger but it should not change a lot in percentage terms.

There are many alleged "rules" or "guidelines about the relationship between
borrowings and net assets, turnover etc but in reality it is a question of what the
partners and the firm's financiers are comfortable with.

Find out what your financier's guidelines are.

It is important to do different types of budgets.

1. Budget for the Raw WIP and Collectable WIP you expect to create in a
   given period. After all this is the "production" you are getting from your
   resources that you invest your expenses in for that period.

2. Budget for the Billings and Expenses… for billings you expect to render
   take into account all factors including the movement in the WIP pool from
   the beginning of the period to the end of it.

Reductions in the WIP pool as a result of billing more than is being created are
not sustainable. Accretions to the WIP pool because you create more than you
bill will put extra pressure on cash needs.

This is why firms that don't record time/tasks as Raw Work in Progress often
struggle even more than other firms with both profitability and cashflow. They
have less information about what is really going on in the business.

This can be a real problem when we all know that just a small amount of extra
collectable production can do dramatic things to your profitability. It's the KMS
ProfitPower™ concept in spades!

While you can look at when you may bill more or less due to holidays or special
events do not confuse this budget with a cashflow budget.

3. Cashflow budget…work out the time it takes you on average for each
   group of renderings to get paid.

Factor in disbursements…remember inflow will only be equal to or better than
outflow over a reasonable period if the firm is not growing!

Factor in all types of drawings

Factor in capital payments…they soak up cash which does not appear in your
Profit and Loss. Examples are loan repayments, large acquisitions, and retired
partner payments etc.
In my experience few lawyers understand the full scope of the working capital
needs in their practices. They do not have enough resources dedicated to
tracking it and getting a proper handle on it.

When they face cash problems they thrash about looking for short-term fixes
and often settle upon the wrong issues as the root of the problem.

Understand it all well and go to your financiers well before the problem is
actually at your doorstep.

At the meeting Peter Heazlewood outlined a more aggressive approach he had
been taking to credit control and confirmed that having a credit professional on
board part-time was the best management decision he'd ever made.

I have attached the KMS report on Debtors which Peter Heazlewood uses in an
improved format…a single sheet with graphs on it tracking three critical pieces
of information. This lets you see at a glance how you credit control resources
are actually performing month to month.

I commend it to you…let's know if you'd like further information.

I have seen partners in many firms get very "stroppy' about the absence of
cash simply because they don't understand where it's gone. They assume
something's wrong but don't know what.

I have attached a simple Sources and Application of Funds Statement which
addresses this issue.

Some time ago we developed a prototype Cashflow model for Turnbull Hill
Lawyers which has subsequently been improved several times.

Anyone who is interested in having a copy e-mailed (it's an Excel document)
should simply e-mail me at

Here's to a great year in all your practices in 2001.

Warm Regards,

Rob Knowsley LL.B MIMC Senior Consultant

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