Thursday, April 2nd, 2020
By Gideon Grunfeld
In our last post, we advised firms against letting go of personnel as a first resort in this time of crisis. That was published before the Small Business Administration launched its Payroll Protection Program, which provides significant financial incentives to keep people on the payroll through the end of June. We continue to advise most law firms to hold on to their people unless they foresee a reduction in demand that would continue once social interactions return to normal.
There is every reason to think that car accidents will resume once traffic returns. In contrast, cruise ship occupancy may not go back to pre-pandemic levels even after the threat of COVID-19 has passed. Notably, the question of how quickly business financing will bounce back remains up in the air.
After 9/11, even the most credit-worthy of business customers struggled for months to obtain financing. As consultants to law firms and other professional services companies, we are working with our clients to help evaluate how each of their existing practice areas is likely to fare, and we are identifying additional practice areas to complement their existing offerings.
So what can professional services firms do to protect their cash flow?
At many small and mid-sized firms, the equity partners collect around fifty percent of total revenues. So, the first place to look in addressing cash flow concerns is non-essential partner compensation. This might strike some as a quaint notion, but having owners economize to keep their people on the payroll is a tried and proven solution in times like these.
Toward the same end, we don’t recommend skimping on expenses that are directly tied to bringing in revenues. Invoices need to be sent out and collections issues need to be handled. Don’t let important administrative functions fall by the wayside, but look at all other outgoing checks for places to pull back.
Firms should first consider the low-hanging fruit, taking such measures as cancelling subscriptions to non-essential services, postponing or renegotiating perks like club memberships, and looking for cheaper alternatives to elements like the company’s phone plan. Communication is vital here to maintaining relationships with your vendors. If you decide to delay a payment or cut out a particular expense, talk to your providers about it so they can plan too. You don’t want to unexpectedly stiff someone, especially in a time when their margins are probably just as tight.
If these measures prove not enough and your firm finds itself in need of an infusion of capital to make payroll, you’ll have to decide where it’s coming from. The sooner you start thinking about this possibility, the better. The fastest option with the least red tape is for partners to pony up the cash personally. Standard bank financing might be harder to acquire during an economic downturn, but you won’t need any institutional approval to charge to your own credit card.
You could tap into an existing line of credit if you’ve got it or consider a higher-interest-rate loan, knowing that you’ll be paying it back in a short period. In this circumstance, business debt is particularly justifiable. Explore the financing options and defer bills where possible to keep the business afloat until revenues improve.
We recommend that you make these decisions in consultation with people who are not as emotionally invested in your firm. These are difficult conversations, so it is helpful to get used to talking about them. We also urge you to increase the frequency at which you review the firm’s cash flow. While monthly or even quarterly is often enough, during a crisis, you should be generating and assessing profit and loss statements every week, even every day if it comes to that.
These are tough times for sure, but professional services firms have generally done very well once past crises have abated. We expect the same to happen here. This too shall pass, and we are here to help you.