Financial Stability Toolkit

Financial Stability Toolkit


Peter Scott and Andy Poole

The Law Society, London 2015; ISBN 978-1-78446-023-5; 102pp; £69.95




Now that the global financial crisis is behind us, it might seem surprising to see a new book on financial stability. On the other hand, one could argue that there is never a wrong time to encourage law firms to think about their financial stability; and the Solicitors Regulation Authority’s focus on this aspect of their regulatory responsibilities would certainly lend force to this view.

Here, then, is a welcome addition to the library. The authors are a former law firm managing partner, now adviser to professional firms, and an accountant specialising in the legal sector. They have insights drawn from years of practical and relevant experience, and can therefore offer a range of insights covering the good, the bad and the ugly.

They begin their journey with an introduction reminding the reader, rightly, of the professional obligation under Principle 8 of the SRA Handbook to run a law firm’s business effectively. This is closely followed by a reference to Outcome 7.4 requiring a firm to maintain systems and controls for monitoring the financial stability of the business. In this sense, appropriate financial awareness, controls and reporting are not simply just good business sense but are part of the mandatory requirements attaching to being an authorised, regulated, professional services firm.

The authors set out in the introductory chapters a range of issues that could undermine financial stability (such as economic downturn, extended cash-flow cycles, and lack of internal discipline), as well as factors that can underpin it (including effective reporting, training, and investing in good quality finance people). Pleasingly – if briefly – they also emphasise the importance of culture, attitudes and motivation in contributing to financial stability.

Crucially, there is a ‘back-to-basics’ chapter on law firm finances, supplemented by some helpful case study examples and ‘homework’ questions. Given the authors’ earlier allusions to the (frankly unforgivable) lack of understanding – or, even worse, wilful avoidance – of matters financial by many lawyers, this is a readable and sensible overview of the key drivers of law firm profit and cash flow.

Following their own advice about the importance of effective financial reporting, there is a practical chapter on management information. It covers much relevant territory, building the discussion, examples and tips around the role of sound and targeted reporting in driving good behaviours and highlighting bad ones, as well as offering guidance on creating financial forecasts and using various metrics to provide early warning indicators.

The book is not all about the ‘doom and gloom’ of financial stability and avoiding the effects of instability. There are two targeted chapters on boosting cash flow and profitability. These rightly address the proper starting point of agreeing a number of things with the client at the time of taking instructions, moving through to managing work-in-progress and debtors, as well as managing overheads and the firm’s human capital.

Finally, if these various approaches to financial stability do not work out, there are two concluding chapters on restructuring the firm and insolvency.

There is very little that one might consider to be missing from this wide-ranging review of financial stability. It addresses regulatory and business imperatives, the principles of effective financial management, and the pragmatics of healthy financial discipline, reporting and interpretation. It can be used both by those looking for a sound overview or reminder of law firm finances, as well as by law firm and finance managers wanting a handy checklist of matters to think about, reports to prepare, and indicators to use. It is useful for both general understanding and practical action.

My disappointments with the book are therefore limited and isolated, and do not detract at all from the overall effect and value of it. First, there is perhaps too much of a focus on ‘traditional’ structures of legal practice and of the financial disciplines that support them. Put differently, the assumptions about the partnership form, the use of fee-earner leverage, and the limited replacement of human beings with technology miss the increasing use of fully incorporated law firms, and those that commonly now use IT and process supported by paralegals and other ‘non-lawyers’ to provide services. These alternatives have different profit and loss accounts, and balance sheets, reflecting new ways of structuring, working, and rewarding, including extracting and sharing returns through salary, bonus, dividend and share value. Their approach to financial stability will have different nuances that are not explored in this book (other than by passing reference to some tax consequences).

Second, the chapter on restructuring is, for me, noticeably more abstract than the earlier ones. It does not even offer a definition or view of the meaning of ‘restructuring’, which therefore remains as an implicit backdrop. For some readers, the idea of restructuring might relate to legal form (say, from partnership to corporate), or result in a merger or being acquired. For some, it might address the structure of the firm’s finances, leading to a shift in the balance between, say, debt and equity, short-term and long-term funding, internal or external financing, and the like. For yet others, it might refer to greater or lesser focus on certain areas of the firm’s practice by dropping, say, legal aid or personal injury work and concentrating on high net-worth or business clients. It is not that the chapter will not help in any, or all, of these circumstances, but rather that without an explicit definition of the various ways in which something labelled a ‘restructure’ might be carried out, there is not enough apparent relevance and nuance developed in the text to help readers as much as it might.

Finally, my sense of reading Chapter 8 on insolvency was that it might originally have been written for a different purpose and merely ‘parachuted’ into this book. Unlike the preceding chapters, there is very little in this chapter that is tied to law firms and their financial stability (or, by this stage, instability). And contrary to my view earlier that not enough attention is given to practice through a limited company, in this chapter corporate insolvency is given equal treatment and then serves to emphasise the ‘disconnect’ with the earlier material. That is not to say that the content is not informative and useful, but it reads as though it could just as well have been found in a partnership or company law textbook; as such, it is furthest removed from any of the book’s other content or billing as a ‘toolkit’.

As I say, these are minor quibbles in the overall scheme of the book and its utility. I should be very surprised if its readers did not gain full value from their investment in it and implementation of the extensive, relevant and practical guidance it offers.