The reason it is important is for future planning and having reliable estimations of the overall bank balance based on the income and expenditure that is forecast. It is incredibly difficult to make significant business decisions that affect the firm financially, without having a gauge of upcoming bank movement.

In my opinion, having large spikes or dips in cashflow can make things very difficult. Dips can be hard to recover from, and spikes in income at the beginning of a period can make it difficult to judge what expenditure can be made during the latter stages of a month. Often after a big spike in income, a firm will spend significantly, and then find themselves miscalculating and being short at the end of the period. I tend to look for a moderate upward trend in cashflow. There will be a dip at the end of a month, usually when salaries are paid, but the overall trend should be gradual and increasing.

The question is, how do we go about doing a cashflow?

Some firms like to have a monthly cashflow. Many will do a budgeted one monthly. The idea being that we can have a gauge each month as to what is coming up and ensure that by the end of the following period, everything is covered, and we have a positive uplift in cashflow moving forward. This is a sensible way of presenting a cashflow for bigger/corporate firms. The report is in line with the monthly budgets of the firm and can be easily presented to board members/partners.

It is important however, to think of the smaller firms and day-to-day running within the legal accounts department. Not every firm is a big hitting corporate firm. Many firms, especially during these difficult financial times are having to be very careful about their expenditure and need to think shorter term, understanding what can be paid when, throughout the month.

This is where the Daily Cash-Flow report comes into its own. It can be used with a monthly budget alongside, if necessary, but the idea behind the daily cashflow is to get a better understanding of when money is likely to be received from clients throughout the month. This will then dictate when certain items of expenditure can debit. The cashier starts by reconciling to the present day, putting them in a starting point that matches the current bank balance. The cashier can then review the debtors and the recent billing, to estimate when certain bills are likely to be paid, plotting into the cashflow on the corresponding days. As this is done, the projected bank balance alters accordingly, giving the cashier prudent dates to plan to make future expenditure. As the month progresses, the cashier can then reconcile each day, updating as they move forward and keeping an eye on the projected bank balance. It gives the firm a real time analysis of what expenditure can be afforded at any given time. Often, we are asked, “can we pay for x this week?” and we are able to respond quickly by saying something like “providing we receive the expected monies from ‘this client’ we will be able to pay x on that day”. This instant response gives the firm management confidence that we are on top of the finances. If that is then coupled with a solid budget, linked to the cashflow then the firm can easily gauge not only what is affordable, but what room we have left in the overall budget to make certain types of decisions on further expenditure.

Not having a cashflow during difficult financial times where prices are rising can significantly affect the firm’s ability to make decisions. It is important to realise that not only are the costs going up for companies’ expenditure, but costs are going up everywhere for the clients too. We are amidst a so-called “cost of living crisis” which means that there is a high probability that clients could be late paying, not pay or seek for bill reductions, and firms need to be prepared for that. A cashflow will help accommodate where a firm is likely to receive less than expected from clients, ensuring that we do not over-spend or spend too early where recovery is going to be difficult.

I highly recommend that all firms look at implementing a cashflow, ensuring that the type of cashflow is one that can be easily maintained and works for them. The Global financial situation is currently too volatile to make the bank account position a guessing game!

20/10/2022

Alex Simons MAAT
Outsourced Accounts & New Business Manager
The Law Factory LLP