Why is Management Information so important?

Douglas Russell is an accounting legal sector partner at Armstrong Watson LLP and gives his advice on the importance of using appropriate Management Information within your Firm

There are numerous reasons why your Firm should have a variety of sources of key Management Information (“MI”) and what those sources should be, will depend on the specific requirements of your Firm. The important point is that the MI produced should be “Quality not Quantity” and should always be accurate, relevant, timeous and systemised. For some Firms, there will be key pieces of financial or other data that are produced on a daily or weekly basis that aid decision making or prompt further investigation. Some Firms will create live MI, while other Firms may only require monthly figures. We will explore some specifics below.

Your Early Warning System

 A reliable source of accurate MI will assist greatly in identifying performance against your Budgets, areas of overspend, aspects of underperformance or simply incorrect internal accounting allocations or adjustments. The more quickly that MI can be available, the earlier issues can be identified and corrective action taken. Core accounting information can be supplemented by a wider range of Key Performance Indicators (“KPI’s”), for example:-

• Chargeable utilisation
• Recovery rates
• Debtor days
• Work in Progress days
• Gross profit %
• Conversion rates
• Success rates
• Case life-span
• Stage of case life-span
• Client satisfaction

Not an exhaustive list, and individual Firms can design additional KPI’s that are particularly relevant to them.

Budget Setting

 Your Firm will typically set a Budget including cash flow projections for the year ahead, and this becomes an important piece of MI as you compare actual results when they accumulate throughout the year. With rising inflation and other factors facing the economy, it may be necessary to flex your Budget throughout the year on more than one occasion.

Combating inflation and maintaining profit margins

We all know the pressures that are facing businesses and individuals with high inflation, high interest rates and rising Corporate and Personal Taxation. All of these factors are likely to suppress demand for legal services from both businesses and consumers, with economic growth likely to remain flat over the next two years, and the possibility of a technical recession looming. Staying robust on your pricing will be key however, and being brave enough to increase your pricing given the specific inflationary pressures your Firm is likely to be facing on such areas as staff costs, energy costs and PI Insurance. In our own experience, our clients generally understand that our pricing has to increase to combat rising costs, so you may well find that there is not as much resistance as you expect. Cost control will be very challenging while inflation generally and sector inflation specifically increases your cost base.

Accurate MI will be a key management tool in monitoring your costs and highlighting areas of possible savings by reviewing suppliers and negotiating better prices. We know that many Firms are undertaking a line by line review of all of their overheads, but care must be taken to trim the “fat” but not cut into the operational “muscle” of your business.

Maintaining recovery rates and seeking out operational efficiencies will also assist in defending or improving your bottom line profits in real terms and only a robust and reliable system of producing the right MI will enable this. What gets measured gets done.

Benchmarking statistics from a pool of similar Firms can also be a powerful way of ensuring that your performance as indicated by your MI is not out of line with your peer group of Firms.

Cash is King

 You will no doubt have heard the saying – “Turnover is vanity, Profit is sanity, but only Cash pays the bills”. Achieving profitable top line growth is an admirable ambition at any time, but to avoid “over-trading”, Work in Progress needs to be turned into fees as quickly as possible, just as fees need to be turned into cash with minimum credit terms. A growing business always needs additional working capital and strong MI can identify this working capital requirement in advance, which will also impress funders to whom you may look to provide lending facilities to support that growth. This is particularly important where there are signs of an increasing number of businesses reaching financial distress and fee debtor days may be lengthening as cash resources tighten throughout the economy. Again, the appropriate MI and KPI’s can be used as an early warning system, so as to tackle any problem cases as early as possible.

Cash flow forecasting on a rolling 12 week basis will be an essential tool in monitoring the adequacy of cash reserves, and measuring against the annual cash flow targets. Some contingency planning based on some adverse sensitivities or “stress testing” is also useful to predict “worst scenarios”.

Interest rates

One of the upsides of rising interest rates, particularly for Firms that are not borrowing heavily, is the ability to generate significant additional income from monies on the general Client Account. Obtaining the best interest rates possible should be a priority, but there is a danger that the windfall to interest income, profits and cash flow this brings, may mask other areas of underperformance in your Firm. The “comfort blanket” of interest income propping up the profits of your Firm may expose the Firm to difficulties when interest rates start to drop again over the coming years as anticipated. While interest income will in itself be a key piece of MI to monitor, focus must remain on the long term profitability and sustainability of the underlying business. Robust MI reporting will help to keep that focus.

Summary

 It is fair to say that the last few years have seen an unprecedented and varied series of challenges for those of us in business. It certainly means that planning ahead and budgeting can be difficult, but we also know from historic recessions and the 2008 financial crisis that the “survival of the fittest” is always true. Indeed there may be great opportunities for Firms that come out of the next two years in good shape when, as it will, the economic recovery builds momentum. Your Firm will have much more chance of being in good shape if you are able to capitalise on, and react to, the early warning system that your MI systems can produce.

Douglas represents the legal sector at top 30 UK accounting firm, Armstrong Watson LLP. He is part of Armstrong Watson’s specialist legal sector team advising law firms throughout the UK on strategic, structural and other business improvement issues. Further information can be found at www.armstrongwatson.co.uk/legalsector

This article is a general guide to the issues that we see in practice.  It is not a substitute for professional advice which takes account of your personal circumstances.  No responsibility can be accepted for any loss occasioned by any person acting or refraining from action on the basis of this article.