by Shaw Gidley25.03.20

COVID-19 has resulted in unprecedented cash flow challenges for many industries. Accounting and law firms will not be immune to the infectious consequences of the COVID-19 economy. As your clients’ businesses suffer, without adequate planning, so will your own.

Now is the right time for accountants and solicitors to carefully review their own firm’s future cashflow forecasts and:

  • Identify any high risk-clients and consider whether to continue to service those clients;
  • Review the Work in Progress (“WIP”) outstanding, particularly for any high-risk clients;
  • Estimate the value of future collectable work as client demand drops off;
  • Account for lost productivity due to office closures and offsite working arrangements;
  • Make contingency plans to finance any cashflow shortfalls;
  • Consider any discretionary cost cutting firms may be able to undertake;
  • Consider future staffing requirements.

Identifying and dealing with “high risk” clients

Practices providing services to clients working in “high risk industries” such as tourism, hospitality and entertainment, retail, construction and possibly any industry deemed “non essential” will need to minimise risk of future uncollectible work in progress and debtors and may be required to factor in significant adjustments to previously prepared cash collection forecasts. Any business that was, previously close to break even or only making small profits, has definitely now become “high-risk”.

Ask yourself, and I am sure that you already have, what would be the consequences to your firm if these clients are unable to pay, how much risk can and will you take? This will lead to a revision of WIP estimates for high risk clients to reflect the likely delay in collectability or likely write off of any uncollectable amounts. The key is not to compound the problem by continuing to service clients that will ultimately be unable to pay.

High risk clients may need to be quarantined in order to prevent further uncollectable WIP accumulating. With the list of “at risk” industries growing, now is an important time to talk to clients to assist them with their recovery plan and allow service firms to better forecast their future cashflow collections.

Consider crucial client relationships and what risks your firm are willing to take to continue servicing those clients. Consider whether it may be time to let those clients go or alternatively agree to defer work until economic conditions become more certain and their financial viability and ability to pay for professional services can be better ascertained. This approach may allow the client relationship to be retained longer term thereby retaining as much business goodwill value as possible.

Stress test your balance sheet!

Think about whether you need to move to a payment up front arrangement. When considering entertaining any payment arrangements with high risk clients, do not forget that if the client falls over you may ultimately receive a demand from a liquidator who may claim those payments to be preferential in nature, and require you to repay those funds.

There will of course also be opportunities to continue servicing clients with healthy balance sheets who will require assistance working through the government stimulus measures. Identifying those clients and prioritising their needs will be crucial to maintaining your own cashflow.

Other revenue considerations 

Other factors to consider which will have a significant impact on previous cashflow estimates include:

  • Office closures - what adjustments are being made to productivity and billable hour estimates? Staff are likely to be less productive as they adjust to the “offsite” office environment.
  • Your client’s offices and workplaces will likely also be closed or working on reduced capacity – what future work will come through in those circumstances?
  • For lawyers, with some court listings now being vacated indefinitely, matters in which recoveries may have been expected will now be delayed or the defendant’s financial position reconsidered.

The cost side – cost cutting

Careful decisions about the firm’s costs may need to be made. Consider the capital adequacy and strength of the firm’s balance sheet. How will any future cashflow shortages be financed? Is the balance sheet healthy enough or will equity partners be required to reinvest money back into the business by way of an owner’s “stimulus package”?

Firms will need to make decisions about what financial levers they may wish to press. For firms eager to avoid the negative staff moral that comes with redundancy programs, controls on discretionary spending may need to be tightened further.

If a reduction in future staffing is inevitable the cost of annual leave and redundancy payouts will need to be calculated and considered in your cashflow forecasts.  Government incentives will assist to some extent.

Firms that have been reluctant to explore offshore staffing opportunities may now need to consider the “cheaper” offshore labour option, particularly where they wish to continue to service their “at risk” clients. The offshore labour force may be able to do some of the grunt work reducing the cost and risk to the business. 

Parting words

Making predictions about your client’s capacity to continue paying your invoices will be difficult. However, being prepared and conservative in your approach may prevent your firm dealing with unexpected cashflow shortages or staff working on matters where WIP is unlikely to be recovered, resulting in further losses. Good communication with your clients as to the risk and the option to place non essential work on hold may actually be seen as a positive outcome for these high risk clients who are desperately trying to prioritise use of their own cash resources.

Planning is key. Stress test your balance sheet using best and worst case scenarios. This will assist you in being prepared for any (un)expected interruptions in your business.

Shaw Gidley are continuing to operate through these challenging times and are available to assist with any insolvency or financial challenges you or your clients encounter.

Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.