Take a step back.  Take a deep breath.  Look at your Balance Sheet and – most importantly – think. 

There is never a bad time to review a firm’s finances.  The firm’s current financial situation, whatever that is, will keep moving and will always be more-or-less secure relative to the world around it and to the specific circumstances of the firm.  Things change all the time.  

Changes can include external factors such as tax legislation or accounting changes, perhaps altering partners’ capital values and retirement plans: or internal factors, such as a merger or the loss of a major client-winning partner. Whatever they are, they keep coming along and ensuring Managing Partners have plenty to do to keep the firm moving forwards. 

What many firms don’t do enough of is to look at their Balance Sheet and see how secure they are to any major change, external or internal.  Of course, those changes should be in the risk register and an assessment of how likely they are and their potential impact will determine what resources should go to mitigating them. 

The Covid-19 pandemic is an example of – I would suggest – an unlikely but potentially damaging event.  It was probably not high on any firm’s radar.  It was probably mitigated by remote working and the use of IT and recently, we have become quite good at that. However, some parts of some firms and some whole firms, such as specialist conveyancers, have found that their lifeblood has dried up. 

What can one do? 

Immediately, the firm has to take advantage of the measures available to them, such as furloughing staff, checking to see if rates relief will be available and applying for loan funding to cover off the shortfall in income.  However – and this is where we return to the beginning of this article – check that your Balance Sheet can stand the debt.  Any borrowing must be repaid – it is the bank that gets the 80% back, not you.  Have you got capacity to absorb the borrowing?  Remember, ultimately, partners borrowing to invest in a firm is just the same as the firm borrowing itself.  There may be differences around tax treatment and the bank’s ability to recoup the money, but it is the same economic entity that is having to earn the money to repay the loan. 

So, monitor your Balance Sheet frequently and know how much financial strain your firm can endure.  If you are not sure that you know how to do that, talk it through with one of our experienced finance team, all of whom are ex- law firm Finance Directors and understand the issues you face. 

The Covid-19 crisis could not have been expected but it could have been prepared for.  If you are not prepared, then you will never know if or to what extent you can cope with whatever the world throws at your firm. 

Let’s be more prepared. 

Written by...

Richard Wyatt FCA