Managing WIP and debtors – getting fee earners to take ownership
How bad is the problem?
Nearly every firm struggles with cash flow, primarily because it is not as good as it might be at managing lock up. The numbers vary dramatically from firm to firm and from one work type to another but on average it takes around four months to turn time spent on a client file into cash. The consequence of this poor state of affairs is that firms are regularly having difficult conversations with their bank and they feel unable to invest for the future.
Given that some firms have managed their lock up down from four months to two months, presumably other firms should be able to do the same. There is no magic solution and it really boils down to individual fee earners taking responsibility for their WIP and debtors. So how do you get fee earners to take more responsibility?
What needs to be done?
The starting point is to ensure that everyone has available to them good accurate management information on their levels of debt and WIP. While this can be expressed in £s it is also helpful for it to be expressed in days as this is a better measure. Providing aged reports is also useful as it highlights which items are rapidly ageing and require immediate attention. Particularly when it comes to credit control, a secretary may be able to help with the initial phoning around to chase debts and the fee earner would only need to get involved if necessary. If WIP and debtors are not going to be recovered they should be written off as otherwise they will distort the real measurement of WIP and debtor days.
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Another way of raising the issue of lock up is to ask fee earners to prepare monthly WIP and debtor provisions for the monthly management accounts. When a fee earner has to prepare a provision they are forced to look at their debtors and WIP and to think about how this is to be turned into cash. Also, if they do not make provisions now, and then provisions become necessary later, then obviously they are made to look stupid.
All fee earners should also be asked to prepare a budgeted fees figure at the start of each month which is split between the fees that they will raise in the first two weeks and the fees that will be raised in the second two weeks of the month. This encourages fee earners to look at their WIP and to plan best how it can be managed. Obviously these targets should be reviewed half way through the month to check that fee earners are actually doing what they promised to do.
One final point to consider is the engagement letter. Whenever possible the firm should, in the absence of specific agreement otherwise, to default to receive money on account, monthly billing and no credit being given once bills have been raised. It is too easy to allow clients vast amounts of credit, even when clients are asking for lower and lower fees. If we negotiated more robustly then perhaps if we agree to a fee discount we could get accelerated cash flow in return.
Most firms still have a 30 April year end and at this date firms make an effort to manage lock up down to a low point for the year. Rather than accepting this as a low point perhaps firms should see this as the beginning of a journey to much improved cash flow?
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