Cash flow and bank financing

Produced in partnership with Robert Mowbray of Taylor Mowbray LLP
Practice notes

Cash flow and bank financing

Produced in partnership with Robert Mowbray of Taylor Mowbray LLP

Practice notes
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This Practice Note provides an understanding of what might cause a law firm to fail and what the bank will be looking for if it is to continue to support the business with additional finance.

The rationale for cash flow forecasting

The short-term risk in all law firms is that they could run out of money, potentially causing the business to collapse. Law firms have poor cash flow from clients but pay out expenses fairly quickly, so they are particularly at risk if cash flow is not managed properly and the business has insufficient capital. The most likely times for a law firm to fail are when starting out, when expanding rapidly or when there is a sudden but significant drop in fee income.

If cash flow forecasts are prepared and updated regularly the business should be able to identify in advance the times when:

  1. it will have surplus funds, and

  2. if additional external finance may be needed

If this can be planned for, there is more chance of finding additional

Robert Mowbray
Robert Mowbray

Robert is an accountant who has worked in and with professional service firms for 30 years and who is an expert on law firm profitability and management. He has provided training and consultancy services to over 1,000 firms across 30 countries. His clients have included everything from the largest City and Global firms, through large regional firms and down to the most entrepreneurial smaller firms. He is regularly asked to help with a wide range of issues including time recording, pricing and fee negotiation, project management, accelerating cash flow, strategy, profit sharing arrangements and improving the quality of management information . Robert is the author of “Maximising the profitability of law firms” and was the author of the Law Society’s annual financial benchmarking survey from 2006-2009. He is the author of “Law firm finance and administration handbook – A practical guide for COFAs and finance professionals” and writes the annual NatWest financial benchmarking survey. He has been voted “Trainer of the year” by the Legal Education & Training Group and is an Industrial Fellow of the Business School at Kingston University. Robert trained in the early 1980s with PWC and spent 20 years as a partner at Macintyre Hudson LLP before setting up Taylor Mowbray LLP with Janet Taylor in 2009 to be a niche and independent advisor to professional service firms.

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Jurisdiction(s):
United Kingdom
Key definition:
Cash flow definition
What does Cash flow mean?

Cash flow is regarded by many as the ultimate test of financial health. Seasoned analysts do not entirely trust the figure a company puts on its profits, since profits can be ‘massaged’, whereas cash is more difficult to manipulate. Profit, as they say, is a matter of opinion. Cash is a matter of fact. The best way to check the cash flow position of a company is to scrutinise the cash flow statement in its annual report and accounts. It provides fact on whether a company has generated or consumed cash in the year, and how. It can be used in conjunction with the P&L to assess the trading results, or it can be used in conjunction with the balance sheet to assess liquidity, solvency and financial flexibility.

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