A recent survey has revealed that over half of Britain’s SMEs are owed nearly £45 billion in late payments, placing severe strain on working capital. Steve Deutsch outlines some simple steps that small businesses - law firms included - can take now to bolster their balance sheets.

Uncertainty seems to be the only certain thing in these troubled times. Between questions over the impact of Brexit, the mounting costs of preparing for the General Data Protection Regulation (GDPR), and rising tax bills, businesses across all sectors are feeling the pressure.

For small- to medium-sized law firms, the challenge to keep up with the pace of change can be made worse by the struggle to manage cash flow and tax commitments effectively, while waiting on overdue invoices to be paid.

In fact, a recent study by Zurich revealed that 52 per cent of Britain’s small- to medium-sized enterprises (SMEs) are owed approximately £44.6 billion in late payments, with over two-thirds experiencing delays of over a month on payments already 30 days overdue. This obviously places a major strain on any firm’s available working capital.

While slow-paying clients will always be a fact of life, there are a number of simple steps smaller firms can take now to improve their financial wellbeing in 2018.

1. Get your house in order

While it’s easy to blame others for slow payments and overdue invoices, inefficiencies within smaller businesses (such as manual fiscal processes and slow invoice deliveries) can all contribute to delays in payment. Investing in automated systems and cloud-based solutions can make it easier to track, control and report expenses, helping to expedite the billing process whilst also dramatically cutting administration fees.

Ensuring teams make clear to clients any payment terms, retainers or alternative fee agreements – along with penalties, such as late fees or withdrawal of services, for failure to pay – can also prove an effective and simple way of avoiding unpaid or overdue invoices from the start of the relationship with the client.

Equally, offering small discounts for early payment or payments in full can also offer an additional incentive for speedy payment, helping to improve monthly cash flow. However, smaller firms should be careful when offering discounts to late-paying clients in order to clear a backlog of outstanding invoices, as this could lead to slower payments from clients in the future in the hope of securing further discounts.

 2. Get specialist advice

Smaller firms looking to prevent late payments from causing cash flow problems can also offset any shortfalls by spreading their tax liability payments over time. Specialist external finance providers can offer bespoke funding solutions which allow businesses to spread the cost of their VAT bills (over three to 12 months) and self-assessment tax returns (over six or 12 months). 

This enables businesses to gain greater predictability over their monthly outgoings, and to more easily manage peaks and troughs, without compromising existing lines of credit. This technique also helps free up vital working capital to support other areas of a business.

3. Get to grips with your tax allowances

For those firms lucky enough to own their own commercial space, capital allowances can prove a valuable source of tax relief for certain capital expenditure – such as building refurbishments, heating and air conditioning, security and communication systems, and IT-related investments.

In addition, the Annual Investment Allowance offers tax relief at 100 per cent of qualifying expenditure. This scheme enables businesses to write off the combined cost of certain assets against profits in the year of purchase, up to £200,000.

4. Get to know your worth

For many smaller firms and solo practitioners, the root cause of poor cash flow can often be found in the amount of fees coming into the business (or not). Especially for start-ups looking to impress new clients, the temptation to overservice or keep fees competitive in order to retain business can be tempting. But the important thing to remember is that if a client isn’t paying for your or your team’s time, you’re effectively working pro bono. And more than that, it means this ‘free’ work is routinely draining away time which could be spent winning or servicing other paying clients.

Going above and beyond for clients is part and parcel of life as a lawyer, but if certain clients are taking up disproportionately large amounts of your time, consider raising your retainers, or capping the time you spend on those clients.

Whilst the prospect of losing, or even firing, a client can be extremely daunting to any business looking to build its revenue – and may seem completely counterproductive to improving its cash flow – the time gained by limiting ‘free’ or ‘wasted’ time will mean more paying clients through the door. It will also lead to firms eventually having the resources to be able to shed those slow-paying clients who routinely affect cash flow.

Over time, when partnered with other cash flow management techniques, taking these steps can help to provide smaller firms with a much healthier balance sheet, far greater productivity, and a chance to really stand out amongst the competition. 

Wesleyan Bank is a partner of the Law Society. Wesleyan can help your firm maintain cash reserves by spreading the cost of your tax liability. Visit their dedicated partner page to find out more.