Financial management should always have been a priority for law firms because not only is it about survival but importantly, unless a law firm has a strong financial position then, strategically, it will not be able to grow and develop to gain a competitive advantage. However, financial management is now not only a compliance matter but has become a big issue for the SRA, given recent law firm failures. In its latest update, he SRA sets out a list of good behaviours to aim for and poor behaviours to avoid. The behaviours listed do however tend to relate more to what happens to cash and profits once generated, which whilst important, do not address the issues of how to generate better cash flow and higher profitability by focusing on the fundamentals of how the business is run. In particular, maintaining ‘financial stability’ as required by the Code of Conduct should be seen as a consequence of how the people in the business are being managed.
However a major hurdle to building higher financial performance is that too often law firms
- do not measure what they need to measure in order to produce the requisite information for decision making;
- when they do capture that information, they do not adequately (or at all) analyse and assess that information; and
- they then do not organise and make available that analysed and assessed information to those in their organisations who need it for decision making.
The results are often that decisions are either not made or if they are made, then they are likely to be invalid and cause loss to the business.