Part 1 of a 3-part series around contingency fee law firms and being financially prepared throughout and beyond the pandemic.
NOT BUSINESS AS USUAL
As a result of the health care and economic crisis, law firms must prepare today for their financial future. Prudent cash flow management strategies beyond the government’s Paycheck Protection Program (“PPP”) is paramount in today’s economic climate.
Unlike previous recessions, the legal industry will most likely be negatively affected during this current recession, impacting law firms’ current and future cash flow.
DISRUPTION TO LAW FIRMS WILL BE FELT BEYOND COVID-19
What makes this recession unique when compared with past recessions? Government mandated business closures and stay at home orders, court closures and resulting delays, reduction in plaintiffs seeking treatment and more. In past recessions, most Americans still went to work, companies stayed open and other sectors of the economy continued to operate.
Based on these factors, many law firms’ future cash flows will be negatively impacted. Many law firms are tightening their spending, reducing salaries, furloughing employees, and prudently controlling their case cost expenses.
The current crisis coupled with the above factors will likely extend the duration (timing of payments) of your existing case inventory and reduce your projected cash flow.
We are advising our clients to be financially prepared and consider the following:
- Your intake volumes have declined – understand today, how and when that will affect your cash flow. Assuming your average case duration is 1.5 years, this means your current cash flow is derived from cases that were initiated over a year ago. And if you applied for and received PPP funds, this will help support your firm in the short-term.
What will happen to your cash flow over the longer term when PPP funds are exhausted and if current intakes have declined due to the pandemic?
You need to play the long game – plan today for tomorrow.
The time is now to consider taking proactive measures to address the inevitable cash flow interruption – especially if your current financial position is strong.
- Self-financed law firms should reconsider being self-financed in this market. If your law firm is self-financed, your healthy business is a “diamond in the rough”– an attractive business with quality cash flow for banks to finance today. The balance of power has tipped in your favor and you should consider capitalizing on it.
Banks covet your deposits and your healthy financial history. You are very likely a strong lending prospect, eligible for favorable borrowing terms. As a strong prospect, there is no better time than now to negotiate favorable terms as short-term rates are low.
You should avoid seeking expensive funding from a non-bank finance company. Banks will be aggressive in trying to earn your business and in most cases will provide you with better rates and terms. Make sure you “shop around” and obtain the best possible financing terms for your law firm.
- Forecast the value and duration of your case inventory. Managing partners constantly inform us that their attorneys are unwilling to estimate the value and duration of their cases. This has major ramifications on your ability to run your law firm as a business and negatively affects your ability to forecast your firm’s cash flow and financial performance.
Our response is simple – during the intake process, someone at the firm concluded that this was a valuable case and worth investing the firm’s time and resources. As your office investigates the details of the matter and assesses the liability, damages and insurance coverage, you should be able to estimate the value of the case and approximate when it may settle – your best estimate is better than no estimate.
Now more than ever, it is critical that you forecast the value and duration of your case inventory. This helps prepare you for any future interruption in cash flow and allows you to put proactive measures in place to help your business remain liquid through any downturn or cash flow shortfall. Ultimately, forecasting also gives you the freedom and confidence to expand into areas that will promote growth.
In future posts we will discuss best practices for forecasting your case inventory.
- Be frugal with costs while investing in future revenue opportunities. Consider cutting back on discretionary spending while investing in future business growth opportunities.Examples include:
- Hire quality employees. Opportunities exist in this dislocated market due to the current crisis.
- Invest in technology. If you don’t have cutting edge case management software, the time is now to evolve. Litify is an innovative case management system, tailored towards revenue generation, financial forecasting and firmwide collaboration on cases as well as case intake and monitoring.
- Align to the new digital era. The right marketing agency will adjust and refine your message and media spend based on what is working. Law firms that will thrive during the downturn will likely have an adaptive marketing message and a strong digital presence.
- Look for acquisition opportunities. As a result of the economic downturn there will be law firms with valuable case inventories but without the financial wherewithal to survive the impending interruption in cash flow. They will be ripe for joint ventures and acquisitions.
Although no one can predict when the crisis will end and what the ‘New Normal’ will look like, there are opportunities and “silver linings” abound for law firms that not only want to weather the storm, but are progressive enough to be see these opportunities in these unprecedented times.
