Robert Mowbray, owner of Taylor Mowbray – provider of financial management advice and training for solicitors and accountants – says: “Potentially, this was fatal, given that firms give about 120 days credit from doing work until they get paid. With all the expenses they have to pay, and if suddenly income dries up, there could have been real trouble.

“Many firms realised they were probably weeks from collapse because they were already borrowing money and the banks wouldn’t necessarily lend them any more – and their income stream looked under threat.”

Professional services firms, particularly law firms, have not typically retained significant capital within their businesses, which left them exposed when the crisis hit.

Donald Forsyth, an Inverness-based partner at accountancy Saffery Champness, says: “The threat depended on where businesses were when it started. For profitable businesses that had good cash flow, they probably fell to a fairly comfortable space. Those that were just hovering on the right side of the line would have found themselves in a very extreme place.”

But cash flow was also affected by the level of technological preparedness of firms. “Firms fell between two camps: those that had IT capability to start working from home immediately and those that didn’t,” says Forsyth. “For firms that didn’t have the technical ability to work from home easily, they experienced a huge impact on their cash flow because they weren’t able to clock up as many chargeable hours or work efficiently.”

Added to which, there was also some capital outlay for those urgently upgrading their tech, purchasing laptops and securing networks.

Despite these setbacks, the government’s interventions back in April averted catastrophe within the sector. The furloughing of staff covered the firms’ largest outgoings, while VAT and tax deferrals pushed back significant bills and government loans gave firms the space and liquidity to make urgent changes to their business.

But during this period expenses also fell. “Travel costs have dropped,” Mowbray says. “But also business development expenditure has fallen, with people usually out and about entertaining, that’s all stopped. So there have been significant cash savings on some expenses.”

As a result of the pandemic and the panic over cash flow, have firms improved their cash flow management? Mowbray says: “It’s always been an issue for firms and they’ve never been good at it. I’m not sure this knock has taught them to be any better at it.

“When I talk to managing partners, they tend to say things haven’t got better; they haven’t got worse. They’re still collecting money in the same credit period as they did before. And many were worried things would get worse because if there wasn’t money in the economy clients wouldn’t pay them on time. But because the government pumped money into the economy, everybody has been doing the right thing and paying their suppliers.”

However, there are some practical things firms are doing. “Clients are getting tougher on pricing and looking for bigger discounts,” Mowbray adds. “The clever firms have worked out that if you’re going to give a bit of your profit away by giving a discount, you need to be a bit firmer at the beginning asking for some cash up front. That’s quid pro quo, and people doing that say it actually works.”

Forsyth says: “The importance of cash flow and lockup hasn’t changed, it’s just that people have woken up to just how important it is. The need for cash flow is more acute, and it is further up the board agenda.

“Some businesses are paying fees in instalments. Many other businesses are paying in the same way as they did before.”

Renewed focus on finance teams

The competence of financial teams in professional services has never been more critical. Mowbray says: “I’ve had some light-hearted conversations with financial directors (FDs) who say they’re suddenly loved a lot more than they used to be. Once they were seen as an admin burden, now they’re seen as people who have saved the firm.”

This spotlight on finance teams has also had a knock-on effect on the skills base. Forsyth says: “For any business to really become good at budgeting and cash flow forecasting, I would say it takes several cycles or two or three years if you’re starting from a blank sheet of paper and you’ve not done this before as a business. For many businesses, that timescale was compressed because some businesses were reforecasting their cash on a weekly or even a daily basis. So there has been an increase in skill levels just through practice.”

Mowbray adds: “There are many firms that don’t have a sophisticated FD but a practice manager or bookkeeper. I’d like to think those people will now feel they need to go out and improve their financial skills. And I hope firms would support them in doing that because the more skilful those people are, the more robust firms will be when we have another crisis.”

However, financial teams have also suffered through the pandemic. Viv Williams, a consultant who provides business advice to law firm owners, explains: “Many non-fee earning people like FDs, HR and IT have been made redundant to take cost out of businesses. They’ve retained junior cashiering type staff – the people who can do the cash collection and reconciliation of balances. But businesses have lost some of the senior chartered accountant FDs with salaries of £100,000-plus, so there is a critical strategic element that has been lost over the short term.” Despite this, Williams is confident those senior FD roles will be re-recruited once the crisis settles.

Lessons learned?

For many firms, the pandemic has been a wake-up call for the need to keep businesses well capitalised. Despite the reliance on outside help, corporate memory can be short.

Williams says: “I think people will revert to the old ways as soon as they can. But I think there is a new structure coming along. We have more Independent Financial Advisers (IFAs} involved in the legal profession in private client work than ever before, the conveyancing market is going into specialist hands. We have offshore practices doing things like file opening and post-completion work, which would never have been done before; it is 40% to 50% cheaper. And the professional indemnity (PI) market is changing beyond recognition. Covid has been a catalyst to change.”

Williams expects the top-tier magic circle firms will stay as they are, but he envisages that the mid-tier and high street firms will see a lot of change. “From a cash point of view, people are questioning what the long-term future holds,” adds Williams.