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Achieving financial stability under OFR

Achieving financial stability under OFR. The scope of our course today. Understanding the requirements of the Code Identifying your priority financial stability challenges Using financial measurement to manage financial stability

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Achieving financial stability under OFR

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  1. Achieving financial stability under OFR

  2. The scope of our course today • Understanding the requirements of the Code • Identifying your priority financial stability challenges • Using financial measurement to manage financial stability • Managing partner compliance and performance to achieve financial stability • Maximising your cash flow • Building profitability • Constructing your financial stability action plans

  3. 1. Understanding the requirements of the Code of Conduct regarding financial stability

  4. “stability” Firmly fixed or established; Not readily changing or fluctuating; Not easily destroyed or decomposed PETER SCOTT CONSULTING

  5. Outcome O (7.4) – Code of Conduct “you maintain systems and controls for monitoring the financial stability of your firm …and take steps to address issues identified” PETER SCOTT CONSULTING

  6. Acting in the following ways may tend to show that you have achieved these outcomes … IB (7.2) – controlling budgets, expenditure and cash flow IB (7.3) – identifying and monitoring financial …. risks including ….credit risks and exposure … PETER SCOTT CONSULTING

  7. Outcome O (10.3)“you must report to the SRA promptly any material changes to relevant information about you, including serious financial difficulty PETER SCOTT CONSULTING

  8. ‘material’? Guidance Notes to Rule 8 Authorisation Rules provide, in relation to a failure to comply: (x) In considering whether a failure is “material” and therefore reportable, the COLP or COFA, as appropriate, will need to take account of various factors, such as: • the detriment, or risk of detriment, to clients • the extent of any risk of loss of confidence in the firm or in the provision of legal services • the scale of the issue • the overall impact on the firm, its clients and third parties.

  9. Acting in the following ways may tend to show that you have achieved these outcomes … IB (10.2) – actively monitoring your financial stability and viability in order to identify and mitigate any risks to the public IB (10.3) – notifying the SRA promptly of any indicators of serious financial difficulty ….. IB (10.4) – notifying the SRA promptly when you become aware that your business may not be financially viable to continue trading as a going concern ….. PETER SCOTT CONSULTING

  10. Examples from the Indicative Behaviours which may mean you are not achieving the financial stability outcomesIB (10.3) – notifying the SRA promptly of any indicators of serious financial difficulty, such as inability to pay your professional indemnity insurance premium, or rent or salaries, or breach of bank covenants IB (10.4) – notifying the SRA promptly when you become aware that your business may not be financially viable to continue trading as a going concern, for example because of difficult trading conditions, poor cash flow, increasing overheads, loss of managers or employees and / or loss of sources of revenue.

  11. What should law firms be doing to make financial stability a PRIORITY? • Identify who should be responsible for financial management • Review financial measurement and reporting • Financial education and training • ‘Cash is king’ - take control of cash management • Drive up revenue / control overheads • Establish an ‘audit trail’ • Adopt ‘zero tolerance’ and ‘partner accountability’ PETER SCOTT CONSULTING

  12. Who should be responsible for financial management? • FD? • Managing Partner? • Both? • Others? PETER SCOTT CONSULTING

  13. Establish an ‘audit trail’ “If you cannot demonstrate compliance we may take regulatory action” • Measure what matters • Report effectively • Train your people • Take advice if issues arise PETER SCOTT CONSULTING

  14. Take appropriate advice, act on it and document it NB – COLP’s and COFA’s responsibilities Outcome O (10.1) – you ensure you comply with all the reporting and notification requirements in the Handbook that apply to you Indicative behaviour IB (10.5) – notifying the SRA of any serious issues identified as a result of monitoring referred to in IB (10.1) and IB (10.2) and producing a plan for remedying issues that have been identified PETER SCOTT CONSULTING

  15. 2. Your financial stability challenges? Cash flow • To manage the bank overdraft? • To pay out last years profits? • Not to have to contribute more capital? • To pay out retiring partners? Profitability • To improve PEP by [ ]%? • To deal with partner underperformance? Others?

  16. 3. Using financial measurement to manage financial stabilityMeasure what matters

  17. Measure what matters

  18. What is the purpose of financial measurement and reporting? PETER SCOTT CONSULTING

  19. To provide clear information to those running the business to enable them to: - Know what is happening / will happen in the business - Make decisions based on sound knowledge - Take effective action PETER SCOTT CONSULTING

  20. Financial measurement and reporting- creates KNOWLEDGE- manages RISKS PETER SCOTT CONSULTING

  21. Knowledge Management Risk Management Risk and Knowledge Management

  22. Financial measurement enables a business to manage performance PETER SCOTT CONSULTING

  23. If you cannot measure it, you cannot manage it. PETER SCOTT CONSULTING

  24. What do you measure?What do you report on?Is your financial measurement and reporting helping or preventing you achieving your objectives? PETER SCOTT CONSULTING

  25. Do you produce data or information? PETER SCOTT CONSULTING

  26. How do you use the financial information you produce? PETER SCOTT CONSULTING

  27. In a law firm what needs to be measured- and why? PETER SCOTT CONSULTING

  28. Examples of what matters-How can we measure the financial performance of each part of our firm?-How profitable / loss making are each of our clients?-Which parts of our firm generate good cash flow or soak up cash? PETER SCOTT CONSULTING

  29. Do you measure things which do not need to be measured in order to run you business - more effectively? - more profitably?- to generate more cash? PETER SCOTT CONSULTING

  30. Do you / your people use everything you measure / report? If not – why do you measure it / report it? PETER SCOTT CONSULTING

  31. Is there anything you should measure which you do not currently measure and report on? PETER SCOTT CONSULTING

  32. Your key performance indicators? PETER SCOTT CONSULTING

  33. Test your KPIs • Why do we produce this information? • Does it tell us what we need to know about our business? • What does it not tell us about our business? • Do we ever use this information? • If not then why do we produce it? PETER SCOTT CONSULTING

  34. Real time or historical information?For example- billings- input PETER SCOTT CONSULTING

  35. Your desired Outcomes?- Accelerating cash flow?- Improving profitability?- Building performance?- Effective business development?- Managing your risks and compliance?- Others? PETER SCOTT CONSULTING

  36. Hard copy or available on line? PETER SCOTT CONSULTING

  37. Frequency of reporting? PETER SCOTT CONSULTING

  38. NB - inaccurate reports destroy credibility PETER SCOTT CONSULTING

  39. Who needs what?How far do you disseminate financial information in your firm?- and for what purpose? PETER SCOTT CONSULTING

  40. Is it enough just to provide reports – or do you need to do more?The role of financial education in a law firm? PETER SCOTT CONSULTING

  41. Financial education and training “I don’t have a clue about the financial reports I receive” • What do you want each partner / fee earner to financially manage? • What do they need to know to be able to do this? PETER SCOTT CONSULTING

  42. Do your partners / other fee earners have financial knowledge gaps?Do they understand why you provide them with financial reports?Do they understand why you are asking them to take a certain action? PETER SCOTT CONSULTING

  43. Would a financial education programme for your firm help to achieve desired outcomes?NB – training is a good way to demonstrate compliance PETER SCOTT CONSULTING

  44. 4. Managingpartner compliance and performance to achieve financial stability

  45. Get your partners into shape Financial management of a law firm is not so much about figures but all to do with managing people (particularly partners)

  46. Zero tolerance – partner accountability • Are your partners prepared to be managed? • The COLP and the COFA will not be able to effectively carry out their roles unless every partner accepts the principle of ‘accountability’ PETER SCOTT CONSULTING

  47. Your partners • Their behaviour • Their performance

  48. In the good times ….. • Why rock the boat? • Financial under-performance tolerated

  49. In an economic downturn ….. • Margins will be under pressure • Cash will be tighter • But will firms get to grips with financial under-performance?

  50. How can law firms address financial under performance issues in an economic downturn?

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