The recent news that directors of a collapsed law firm admitted to allowing its client account to be used as a banking facility leaving creditors with a £14m shortfall, highlights the very great challenges faced by PI law firms.
Unpredictability, particularly when it comes to cash flow, is often the only thing that seems certain in the world of PI. However, no matter how bad things get it is absolutely crucial for firms to adhere to the rule that client money is not the firm’s money and under no circumstance is it a financing option, not even for the short term. This includes unpaid professional disbursements received, which must be transferred to the client account if they are not paid. They cannot be left in the office account and used to fund the business.
Difficult as it might be, PI firms have to trade with the funds they have available and hold their nerve under pressure.
Of course, it is completely understandable why some firms get tempted when money is tight but in our experience the worst thing they can do is focus solely on cash collection through any means. A situation whereby the money comes first and the client comes second often leads to cases being settled too soon and at a lower value. Such an approach only sacrifices profit for cash and builds a significant professional negligence risk in the business.
A major problem for claimant PI firms is identifying in advance the appropriate amount of working capital they need to fund the business and this is often the cause of cash flow pressures. It is not a straightforward process and needs a thorough understanding of how different case types and litigation strategies impact cash flow and working capital requirements. In our experience, those firms that proactively analyse their past cases and use these insights to predict future performance tend to be more successful at navigating the cash flow uncertainty of running PI cases. After all, knowledge is power.
Most firms have some sort of case management system in place and so already have the ability at their fingertips to better understand their case load and make accurate predictions around future performance and cash availability. Yet, failure to keep accurate, detailed and consistent records is a common problem.
We try to help the firms we work with to gain real-time clarity on the current state of all their cases, no matter how big the volume. Only once you have this information can you know the real value in your business and make accurate future predictions.
Those with expertise in PI will know that there is no easy way to value WIP without first knowing what lies beneath. Factors such as work type, hourly rates applied and recovered, proportionality, risk assessment, case length, quality of expert witnesses and likely fee income to be derived are all crucial factors in assessing the value of past WIP and future potential, and go into the melting pot of cash flow prediction and profit management in a PI business.
Banks, insurers and funders continue to be active in supporting PI law firms in straightened times, yet in a market when the focus is increasingly on fixed-costs and with future uncertainty over the small claims limit and a general damages ban for soft-tissue injuries lurking, PI firms will increasingly be expected to demonstrate a thorough understanding of the value in their own businesses and have an ability to model the impact on cash flow and profitability that these changes may bring at their fingertips
Steve Carter is COO of SpectraLegal