Three quick fixes a firm facing cash-flow difficulties can make
January can be a tricky time for firms
31 January is the weakest point in the financial calendar for many law firms, with LLPs left particularly vulnerable. In our recent survey of law firms, 93% of respondents were confident about the year ahead and yet, despite high levels of confidence, harsh financial realities can catch firms unaware in the New Year.
Many law firms find cash hits its lowest level at the end of January. However, partnerships are often faced with a challenging position when compared to companies. Unlike companies that settle PAYE/NI liabilities on a monthly basis, partners tax liabilities are settled in two lump sums in July and January each year.
However, partners also want to receive their share of profits previously earned. This often leaves a firm with minimal levels of surplus cash and therefore more susceptible to small downturns in cash flow, an occasion which regularly occurs over the winter months.
New Year, new problems for firms
December and January often bring a number of costs that need to be paid: a quarterly rent payment, VAT and the lingering effects of the professional indemnity insurance renewal. If cash flow comes under pressure, firms may well be tempted to ‘borrow’ from the funds set aside to pay the tax liability, no doubt with the intention that these will be shortly ‘repaid’.
However, the old adage that nothing is certain but death and taxes is never truer, so come January taxes still need to be paid. Therefore, if cash flow does not improve the tax reserve may not have been repaid. The result is a perfect storm of financial difficulties for professional practice firms. It is why the industry often sees these firms seeking funding advice at the turn of the year.
Three quick fixes firms can consider
Partners inject money
Short term bank loans
...and one they should not
- Late payments
Should a firm find itself in difficulty, then the management team can turn to the other partners and seek quick funding via an injection of capital to tide the business over, or reduce the amount they take out in drawings. Partners may not be amenable to this request as they are all likely to have their own bills to pay.
Short-term bank loans can bring some comfort without aggravating the internal pressures. However, it’s unlikely that a partnership will be able to secure acceptable funding, at a good rate, within the timeframe that is often open to it.
A firm can make an agreement with HMRC for time to pay and this is a tried and tested route. In today's world, the tax authorities impose far more restrictions than they used to, especially if there has been a request for time to pay on a previous occasion.
The firm has the option to simply pay late. However, the fines and interest rates for doing so, coupled with the reputational damage, means this should only be an option for the most desperate.
Quick fixes are not solutions
Ultimately, if a firm finds itself facing a cash-flow problem they need to consider how to deal with the short term issue and then put a plan in place to avoid this problem in the long-term. Those in charge need to make some tough decisions and take urgent remedial action to bolster their cash position, to give them time to plan for the long-term.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.