Addressing the challenges of financial management in chambers

 No one welcomes having to pay their rent, but it’s a fact of life for a member of chambers. For many, the role of Treasurer or being the manager tasked with financial management of a set means being faced with an unpleasant challenge. There is a potential conflict of interest between a chambers and its members when it comes to setting and collecting rent. Can this be addressed and what are the financial controls that should be in place to ensure that members can see their money is spent effectively?

From fee note to receipt of funds, to rent invoice, to payment of chambers’ costs, the financial management of a set should be a straightforward task. One of the key benefits of working within a chambers is that it allows members to spread the costs of clerking, premises and administration between them, so there should be a clear cost advantage. Yet many sets have faced problems over the years and some sadly have failed completely.

A simple challenge is that each member’s individual practice is a business in its own right and the chambers must be able to demonstrate value for the money being charged. Another issue will always be getting agreement to significant expenditure, as each member will have their own view as to what the priorities should be.

A previous article[1] considered the important factors in delivering change in chambers. One of the critical points highlighted was the necessity of good quality communication. Building confidence in the financial management of a set relies just as strongly on good communication. This ranges from setting and agreeing expenditure budgets and investments, through to reporting clearly and accurately on performance. Its importance cannot be underestimated.

Cash is King!

First and foremost for any organisation must be cash flow management. Many businesses have proven that it is possible to post losses year after year and yet still be in a position to operate. A classic example would be Amazon. This comes down to the availability of funding provided from capital reserves or other lending / investment sources (or for a chambers, its members).

We have also seen nominally profitable businesses that have failed despite apparently healthy billing. The biggest issue in these cases has been problems with the recovery of fees from clients. In addition, organisations that rapidly expand, without proper planning, can face difficulties due to increased working capital requirements (the cash within the organisation needed to cover running costs on an ongoing basis).

To manage effectively there are two points to consider:

  1. Every set should ensure that it has robust fees recovery processes in place. Good fees clerks may not bring in new revenue, but they can be critical to the financial health of both members and their chambers. There are too many examples where debts have been allowed to build over many months, and even years, without any realistic plan to recover the money owed. These debts can still show as value in aged debtor reports when in reality the chances of them ever being recovered is minimal. This distorts the picture and can lead to unrealistic expectations.

Therefore as a first step, take time to assess whether or not these fees can realistically be recovered. Are they worth pursuing? If not then they should be written off, even though this will be very unpopular with the barrister involved. If they are worth pursuing then steps should be agreed to actively chase these outstanding fees.

Build ups of unpaid fees may also reflect that not all clients are as good as they appear at first sight. It is important to recognise where clients / solicitors are poor payers or they present a high credit risk. Put in place what practical controls you can to mitigate such risks.

As a significant proportion of rent will normally relate directly to members’ receipts, this has a direct impact on chambers finance. Just as there is a need to be firm with regards to collection of fees, chambers need to ensure that all members have paid the agreed rent in a timely fashion. Allowing this to drift is very damaging to finances and unfair to those who pay promptly.

  1. Cash flow forecasts are a critical part of any good financial management process. Knowing where you are likely to be in the weeks and months ahead is vital. Simple predictions relating to income and expenditure will allow sets to plan properly. As well as likely receipts it’s important to keep track of the big crunch points such as quarterly rents for offices, VAT bills or planned major expenditure.

Forecasts should be looking ahead at least 12-18 months and updated regularly. This allows a chambers to prepare for, and address, times were finances may be seriously overstretched, before they turn into a true crisis.

On a more positive note it can also show where cash reserves are building up beyond what is necessary for chambers to function properly. It may even indicate a time when it is appropriate to offer a rebate to members.

Managing the cash within chambers is the most important aspect of good financial control. Being able to report on the position now and to give clear predictions with regards to future demands is a valuable tool. It builds confidence that the set is being operated on a sound financial footing.

Forecasts & Budgets

Effective forecasts with regards to future revenues and costs are important to a well run set. Ideally budgets should be prepared in advance of the new financial year and be revisited during the year to allow for significant changes, such new or departing members and staff. While finance and management committees will inevitably be involved in the fine detail of preparing these, all members should also have buy in to the plans and be able to compare actual performance against these over time.

  1. Major expenditure

As a first step it is worth considering the strategic priorities for the coming years. Will there be significant investments and/or expenditure requirements that need to be planned for? This will be relevant even if they are not going to happen in the next financial year. Movements to new premises, refurbishments or investment in new IT infrastructure can all have a big impact on chambers’ cash position and need to be properly planned for to minimise the impact on members’ own finances. It’s better to build reserves over months or years rather than generating a one off large bill.

  1. Revenue forecasts

Analyse the likely revenues for members. Feedback from members, clerks and historical performance are all valuable sources that help to achieve realistic predictions for coming year. Remember to consider any significant changes in circumstances (e.g. completion of pupillages or sabbaticals). It is also helpful to consider how billing varies across the year. Typically, there are quieter times across the year which can have a knock in impact on the finances.

These predictions with regards to members’ revenue and receipts impact directly on the rents charged to members. A key part of the financial planning process is to compare these predictions to the budgeted costs. In some cases, this may lead to difficult discussions with members with regards to rents being charged or costs savings needed in order to match income. While never pleasant, it is still much better to be doing so before a set hits a critical point.

  1. Costs and overheads

Within any budget there will be variable (direct) costs that relate directly to the billing. Within the budget these will flex in line with the predicted revenues. A good example of this would be any clerking salaries where there is a significant proportion of the salary relating to the receipts by members.

The fixed costs are simpler to spread across the year. Rent, service charge and rates on the property will be easily identifiable. Budgets for areas such marketing and IT will require more in-depth discussion and justification.

This is not a case of simply minimising all costs. It is important that consideration is given to the value delivered by this expenditure to everyone from prospective clients and referrers of work, to members, to employees. For instance, spending on marketing events or investment in chambers infrastructure may make a real difference in gaining and retaining the quality of clients, members and staff that are wanted.

Reporting

Prompt and accurate reporting is central to building confidence in the financial management of chambers and in avoiding many of the difficulties that have been seen in the past. Detailed management accounts showing performance for the month and for the year so far are important for those tasked with oversight and management of the finances.  They become far more useful when viewed in comparison to the budget and to the previous year. It then becomes possible to identify any unexpected changes and to investigate.

For members not directly involved in the financial management of the set regular accounts are rarely read or even appreciated. Instead a summary of key measures (or key performance indicators (KPIs)) are a valuable way of demonstrating how well the set is doing. Often this develops into a “dashboard” of KPI’s, often on a single page and with comparisons against targets and/or historical results, that can be reviewed easily. If they generate questions then more detailed information can then be provided.

Typical areas to be reported include:

  • Revenue Generation – such as the number of new instructions and value of fees billed
  • Debt recovery (fees) – value of fees recovered, unpaid fees, or value of outstanding fees over a certain age
  • Chambers finances – including revenue, outstanding members’ payments, costs, cash flow and reserves

Such simple reports, delivered on a timely and regular basis can go a long way towards building confidence in the financial management of the set and making sure that members are aware of how the set is doing against commonly agreed goals.

These KPIs can also be a valuable way of focusing members and staff on improving specific areas. Developing more specific measures can be a useful part of performance management. If a member of staff is being measured, and potentially rewarded, against specific KPIs then they will inevitably focus delivering against these.

There is an important note of caution here. Care should always be taken to set the right measures and targets. A badly designed target can encourage the wrong behaviour. For instance, merely counting the number of new instructions will not guarantee their value. It is therefore valuable to consider what are the important areas of performance to focus on and how they can best be measured.

In summary

Reducing the tension between the financial demands of members’ own practices and that of chambers is, in large part, about ensuring clarity with regards to how those funds are being used and the value that they are delivering. Agreeing long term expenditure plans, targets and annual budgets and then regularly reporting on them, in a transparent way, is central to this.

Even if there needs to be a difficult discussion with regards to rent increases or reductions in overheads, then these will always be managed better where all involved have a proper appreciation of the position and it doesn’t come as a shock out of the blue.

Most importantly chambers must closely monitor cash flow and the likely position many months ahead. Developing good cash flow forecasts allows a set to plan properly for the future, ensuring that potential crises can be properly prepared for to avoid disaster. It may also be the means by which surpluses and excess reserves can be identified and funds refunded to members when it is clear that this will not create further problems later on. A positive note to end on!

 Alex von der Heyde BSc (Hons), MBA, MIoD, Managing Director, Esterase Ltd

Email:    Alex.vdh@esterease.co.uk

Tel.:       08455 199149

[1] “How can we deliver successful change in Chambers?” – Barrister December 16

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