Blog - Management speak

An accountancy lesson for law firms

Lawyers need to up their game on business finance if a recent report from Baker Tilly is to be believed, says ex-lawyer and businessman Nigel Cannings.

Keeping an eye on the bottom line Patpitchaya

If Baker Tilly is to be believed, it seems that half of all bears are unaware of the requirement to choose a sylvan location for defecation purposes. Yes, as recently reported in this journal, a report found that half of partners in law firms are unaware of the effect that their firm’s insolvency would have on them personally:  If you go bust, bad things happen.

It is true that I have been out of private practice for a number of years now, and being the owner of my own business, have had to pay close attention to things like cashflow and paying the staff on time.  But surely those people who spend a lot of their lives advising others on how to run their business ought to know how to run their own?  And that if you run out of money, and you are a partner, you have a personal liability that may come back to haunt you.

This, as I recall, was one of the arguments in favour of the LLP, to allow law firms to act more like a limited company, where the liabilities of the partners was not unlimited, but capped as it would be for a participator in a private company (allowing for the exceptions of fraud and wrongful trading). Still, if things have gone wrong, and it has not been carefully managed, the effects can be personally devastating.

Obviously, the report is a sales tool for Baker Tilly’s Professional Practice Group,  but it highlights a very important issue, one that has been increasingly addressed by larger firms, but is a tougher nut to crack for smaller firms:  A good solicitor is not necessarily a good businessman or businesswoman.

Understanding accounts

For those of us who qualified in the deepest mists of time, the only training we had in how to run a law practice was the mandatory Accounts course on the LPC.  I am hard pressed to remember a single moment of a single lecture, and I challenge any of my peers to do so.  From a quick scan on the current LPC requirements, little seems to have changed, with a focus on the more vocational elements of training to be a solicitor, with little regard to the more practical elements of running a business.

Of course, not every person who trains and qualifies as a solicitor will be required to run their own practice, or in fact to be a participator in day-to-day management.  More and more for medium and larger firms the commercial elements of running a firm are being managed in a professional fashion, and the Chief Executive is no longer always a lawyer.  If they are, it is more merit driven than Buggin’s Turn.

Even allowing for that, though, would it not be a good idea if anyone who is pursuing some form of commercial law career actually understood how a company actually works? Not when to file a form 88(2), but actually the nuts and bolts of cashflow, balance sheets and sales targets?

Financial management is key

If the Baker Tilly survey is correct (and I worry that perhaps it is), it means that a very large proportion of senior advisers are blind to how the commercial world works.  Not all of them will be called upon to advise companies, and they may specialise in areas such as personal taxation that have no bearing on the management of an enterprise.  But that still leaves a large rump who seem not able to manage their own affairs, and so probably shouldn’t be allowed to advise on other people’s.

Often it is the cry of people who move in-house that they want to be “more commercial”, and “closer to the business”.  To a degree that is true, but it is very rare that you get close to the mechanics of how the finances of the company managed.  All you are doing is getting closer to the decision makers.

The report is worth a read. It is full of practical advice that everyone should be aware of.  We have all seen the increase in issues at law firms, and of those practices sliding into insolvency at rates we might previously have though unthinkable.  It should be the case that anyone running a business (and if you are a partner, that is what you are doing) should understand the risks and how they are being mitigated day-by-day, week-by-week.

Baker Tilly are telling us that half of all lawyers don’t know that.  Lawyers hate having things pointed out by accountants, but it is one of those rare occasions I find myself agreeing with them.  Understanding financial management is at the heart of running, and advising on, any business, large or small.



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02 December 2013

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