Editorial: Analysis Shows Increased Cash Flow Troubles for PI Firms
Running a personal injury law firm has never been so hard. With regulatory changes eating into profit and cash flow stymied by the slow billing process in cases, it is no surprise that many are reportedly teetering on a cliff edge.
Indeed, analysis of the UK top 50 law firms’ accounts by Smith & Williamson has revealed that over £5bn is owed by clients to law firms and nearly £2bn is sat on the books unbilled. In effect, law firms are missing out on nearly £7bn of additional cash flow. This year’s figures for amounts owed and unbilled matters represent a 9% and 6% rise respectively.
But the headlines of record-breaking revenues splashed across the pages of the legal press just serve to disguise the problem. As the old adage goes, turnover is vanity, profit is sanity and cash flow is reality. Even profitable companies go bust if they don’t have the cash flow to prop up the day to day running of the firm. Many firms do not see a widespread cash flow problem until it is too late.
These cash flow problems aren’t the preserve of the top 50. Indeed, the problem is acute in PI. The Government’s long-awaited reform to raise the small claims track limit has meant that cases worth less than £5,000 will not be viable for a law firm. Reforms have impacted heavily on cash flow for law firms and put them at real risk of failing. Some firms have already been forced to close or make redundancies as they have been impacted by the personal injury reforms.
It follows that speeding up access to the cash tied up in the cases PI firms do take on is paramount. According to the statistics, the time between a bill for work being issued and then paid for has increased to 122 days, a two day rise on the previous year on top of the two day rise the year before that. That’s in excess of four months for a bill to be paid!
Ultimately, PI firms need to be cannier around cash flow. At VFS Legal Funding we feel that firms shouldn’t settle for less – for instance using a cash advance facility to immediately get funds against a bill of costs as soon as it’s been drafted enables firms to release cash tied up in a bill and gives the financial muscle necessary to negotiate the right settlement level.
Where would a more predictable cash flow leave PI firms? A predictable cash flow enables a firm to better manage its needs, allowing investment in new initiatives and business expansion.
Needless to say, financial management is now imperative for firms that wish to adapt, grow and remain competitive, and a clear direction in business development needs to be complemented by a similarly focused approach to the bottom line.
Norman Kenvyn, Founder and CEO of VFS Legal Funding