The importance of having good management information within your law firm
Your firm’s COFA is partly responsible for the efficient running of the financial management of the practice, due to their necessary close interaction with the SRA AR. However sole responsibility should not lie with that one individual. All members of your management team should play an active role.
Good financial management processes should include monitoring and reporting procedures. Reviewing consistently updated management information is a way of complying with this requirement, but it may also help to improve business performance.
Monthly management accounts enable your management team to see in black and white how the business is performing and take immediate action where necessary.
If you wait until you receive your annual accounts, you will almost certainly have been overtaken by events. Any issues or themes will continue right up until the annual accounts are completed, sometimes even nine months after the year end. There is therefore a further concern in that the annual accounts will also affect your current year, potentially producing a knock-on effect that could destabilise your ongoing performance.
It is important that management information is as specific as possible, including depreciation costs, accruals and prepayments and accurately calculated work in progress figures – otherwise the information can be rendered meaningless. As accountants and business advisors to over 60 legal firms, we are surprised to note that these adjustments are quite often ignored until we prepare the year end accounts.
Tax and dividends/ drawings should also be included as they also impact directly on your cash balances and therefore your trading position from one month to the next.
Another major benefit of up-to-date information is that it enables the management team to monitor performance against budget, and make important decisions on a timely basis. Equally importantly, the effectiveness of these decisions will become apparent in the next set of figures, allowing fee earners to take action if this becomes necessary.
In addition, there are considerable competitive advantages in being able to quickly identify emerging trends in various areas of the business. For example, falling fee income or margins, decreasing recoverability, increasing staff and other costs and rising levels of lockup, are all important indicators of how a business is performing on a month-to-month basis.
These indicators can also be benchmarked to national averages, so you can see how your business compares to firms of a similar size to yours. And again, important business decisions can be made as a result of these comparisons.
As the legal landscape continues to be challenged, 13-week cash flow analyses are also vital to financial stability and monthly management information can be used to calculate income and costs with consistent accuracy.
Regular management information will also create a favourable impression among bankers and other fund providers, who will be more likely to approve any loans or overdrafts if they are confident that you have a tight rein on your business finances.
If you would like to discuss the above blog in more detail, or you would like to speak with a member of our team, please contact us on 01772 821021 to be put in contact with a member of our Professional Practices team.