Building a stronger focus on Cash by:
- a guide by firm governance
- a focus on Cash as part of the performance management system
- clearly defined responsibilities thorough out the firm
- development of skills to enhance Partners contracting with their clients
- improved processes in place to assist with the management of Cash.
- Reporting of Cash (viability)as prominently as profit (sanity) and at the top of the monthly reports next to Revenue (vanity).
One of the critical issues highlighted by the pandemic was the vital need to manage Cash.
Cash reserves are essential to ensure that a business or practice remains viable.
Cash is needed to pay the staff, keep the cogs turning, the doors open and lights on. In a professional services firm, “pay the staff” also includes Partner draws.
In an extraordinary time, liquidity is essential to ensure the company or practice does not go bankrupt.
Those firms that had in place systems and processes that focused on Cash collection and Cash reserves continued to be viable and resulted in those firms continue to invest, moving ahead of the pack.
The Focus on Cash
There appears to be a clear indication that corporates of all persuasions have shifted their focus from earnings to Cash.
Cash must become a vital component of the firm’s culture. It can no longer be an agenda item that is brushed over. Systems and processes also need to be addressed, ensuring they develop a Cash focus.
Two Places to Focus On
The first and obvious one is day-to-day purchases and capital investment. And another Cash outflow is Partner draws.
The other end of the spectrum is Cash collected from clients.
Who is Responsible?
It is not uncommon that professional firms focus on Cash outflows and merely talk about but do not enforce Cash collection from clients.
Firms use lock-up days as a measure in an attempt to manage Cash. Lock-up days are a great way to blur what is happening.
There is no direct correlation between lock-up days and firm viability.
In my view, this should be the primary focus of the firm. They have closely managed their Cash and Cash reserves.
How to & By Who?
Embed the essential need to manage Cash into the culture.
The first component must be articulated roles and requirements along with acceptable benchmarks.
Clearly define who is the right person in the right roles doing the right components of the Cash cycle.
Many organisations believe that Cash management is the sole responsibility of the CFO and finance team. Even in the corporate world, this can no longer be the case. The finance team must work closely with each department which has an impact on Cash management.
I believe that the primary responsibility for Cash inflows rests with Partners. They are the direct manager of the client relationship. Although it is possible to have systems and processes to assist in the first incident, Partners have to be responsible.
Another critical component is the issuing of invoices regularly and early. There can be no latitude for the delayed invoicing of work in progress. Instalment processes are essential to support Cash management.
They are the ones that have the client relationship. Significantly they are the people who contract with the client, which includes services delivery and payments received.
Accordingly, Cash collections have to be an essential item in the performance management of Partners.
Another component of this process is for the governing body to ensure that they have adequate reserves for investment in future growth initiatives and developments.
Concerning capital expenditure and Cash reserves, those decisions ultimately live with the firm’s governing body and managing Partner. However, to ensure success in this process is essential strong communication exists between the governing body and equity Partners.
However, in a professional service firm, especially law firms, even the primary relationship ultimate responsibility has to rest with the client managers, usually Partners.
Not only should Cash be a primary agenda item for the governing body and each practice area, I believe that the financial reporting beach of the practice areas should include a topline of both Revenue and Cash collected. Only then will the focus on Cash the highlighted.
Many firms attempt to manage Cash by calculating lock-up days for WIP and debtors. I believe the pandemic highlighted that this could no longer be a secondary process. These nondescriptive performance indicators can no longer muddy Cash reporting. Cash has to be adjacent to the revenue line.
Performance management processes should ensure the ownership of Cash targets for the respective practice areas and their Partners.
Those firms that have managed their Cash effectively before the pandemic continue to remain resilient. They then emerge from the effects of the pandemic substantially more potent than their competitors.
Focusing on Cash enables them to invest more into services development and all capital expenditure. Firms can move away from their competitors and be more dominant in their market areas.
Opportunities to Strengthen Client Relationships
Importantly, those firms managing their Cash prudently before the pandemic can better manage their client relationships. Where necessary, they can solidify client relationships by offering them longer payment terms where those clients have Cash flow problems.
Something New – Move Cash to the Top Line When Reporting.
I believe that firms must begin to build up Cash reserves. These Cash reserves include a component available to manage risk should such a situation occur again. Cash reserve should also have a part available for investment into innovative ideas and new client challenges. I believe this is the future that professional services firms are facing. Firms that deal with their Cash management the best will move ahead and continue to be more successful.
What to do.
- Move Cash reporting to the top line. Monthly reporting should include Cash Collected (viability) compared with Budgeted at the top line next to Revenue (vanity)
- With the end of the pandemic in site and business continuing to look more like pre-pandemic operations, now is the time to readdress your Cash management culture, Cash collections, strategic Cash investments and importantly, build up the Firms Cash reserves to an optimal level.
- Build up your Cash reserves to an optimal level gradually. Done steadily, impact on Partner will be reduced.
- Continue to be viable!
Firms that take this opportunity will be more competitive. Those that let momentum pass will find themselves on the sidelines again when the next crisis hits.