South coast business and tax advisor, CW Fellowes, is advising professional legal firms to bolster their financial management practices, following changes in government policy regulations, and the abolishment of the assigned risks pool (ARP) by the Solicitors Regulation Authority (SRA) in October.
The SRA recently identified over 1300 legal firms as being at high financial risk, due to their dependence on certain types of work, such as personal injury, legal aid, crime, and scale conveyancing.
CW Fellowes’ Managing Director Adam Wilson encouraged these firms to engage with the SRA as soon as possible, to reduce risk to their clients, and gain the support from the Authority to help them return to a sound financial footing.
Adam commented, “Changes to legislation will leave many legal firms financially exposed and at risk of closure. With the policy changes and the ARP safety net soon to disappear, legal professionals need to take steps to remain buoyant in this particularly difficult economy.”
“The support offered by the SRA will not come in the form of a blank cheque, however,” he added, saying that assistance from the SRA will be given only if legal partners are willing to make changes to manage their finances better.
“The SRA will want to see financial information relating to each firm, including net profit and drawings.” Draw downs by partners, particularly those not made on the achievement of key performance indicators, are the greatest de-stabilisers of most legal firms.
Borrowings will also come under the scrutiny of the Authority. Adam continued “It is not uncommon for firms to use short-term borrowings to fund partners’ tax, or use VAT received as cash received.”
Legal firms are traditionally heavily dependent on high overdraft borrowings and very often, capital injection by partners is 100% borrowed.
Many legal partners and senior managers are not generally involved in the financial side of firms, and are often unaware of the financial status of their partnership, and the risks they face.
Adam said, “With key financial information not being shared between rank and file partners and senior managers on a regular basis, uninformed decisions are being made.”
He advised legal partners to gain a good hold of the firms account bank balances, and to stress-test profitability on a regular basis. “Be prepared to take advice and deal promptly with requests for information from regulators,” he added, making specific reference to the SRA’s request for firms to work with them.
