Obtaining funding has never been an issue for law firms – until the arrival of the credit crunch.

Yet many legal practices seem oblivious to the changing attitudes and requirements of the banks.

Every law firm planning to survive the recession should be focused on sound financial management.

The days of a law firm requesting an increase in their overdraft facility on the back of a telephone call to their bank manager have come to an abrupt end.

The credit crunch and the subsequent fallout from a number of significant insolvencies in the legal sector have left the banks nervous about funding legal practices – and who can blame them?

Yet even now I am often asked: ‘Why is the bank asking me for information about my management accounts and cash flow forecasts?’

Surely this shows a naivety in the minds of some solicitors who cannot understand why the relationship between the banks and the legal sector has changed?

In reality it’s time to accept that the banks’ traditional ‘rose-coloured spectacles’ view of the sector has all but disappeared.

We are seeing no evidence of increased bank lending and, with mortgage approvals hitting an all time low in January, there are no signs of recovery for the sector.

Indeed there is significant concern that as 2011 progresses more and more practices will become financially challenged, culminating with the professional indemnity renewal on 1 October.

Already there are more than 300 practices in the assigned risk pool and this figure could well double by the autumn. It is rumored that the Solicitors Regulation Authority is seriously concerned by the amount of potential interventions the next twelve months could bring and its ability to cope.

The banks are now actively seeking out potential risks and subsequent bad debts within their lending books, leading to a change in direction and practice around their credit policies.

And, for the first time ever, this includes credit policies for the legal profession.

As a result of this closer scrutiny, banks are identifying a lack of financial acumen and control in a significant number of legal practices.

This is particularly true of traditional high street SME partnership practices that do not - or cannot afford to - employ a practice or financial manager and where financial responsibility is allocated to one of the partners.

Unfortunately, during their extensive training solicitors are not taught how to run a business and deal with finances.

Often the partner dealing with finance does so because no one else wanted the role.

Thus, the financial control of legal practices, has often been managed using a secondary, after-hours, ‘fit it in where we can’ approach.

However to support and lend funds to law firms, banks increasingly want reassurance that practices are being run in a proper business-like fashion and are effective and profitable organisations (ironic perhaps in view of the recent government bank bail outs).

Banks will now look carefully at how a practice is run, by whom and with what support.

For example, does the firm have a qualified legal cashier, practice manager or accountant to enable them to determine the effectiveness of the business?

They will also look more closely at factors that may impact on the future trading potential of a legal practice.

These may include legal aid contracts, costs information and costs estimates (an area where many firms are very vulnerable to action by a client if information has not been given or updated), interim billing, monies on account, staff appraisals, potential negligence claims, complaints procedures, IT back-up facilities, results of Solicitors' Accounts Rules (SAR) audits, anti-money laundering regulations etc.

All of these, plus how the firm is managed on a day-to-day basis, are likely to be taken into account in deciding whether or not a practice is a viable proposition.

My day-to-day experiences working with law firms have demonstrated that many do not have basic, established, sensible working management principles in place.

An often-encountered problem is that there are no agreed income and expenditure budgets or costs-delivered targets and therefore partners cannot produce effective management information which tells them if their firm is profitable or not.

I have recently seen a case where a bank repeatedly requested monthly management information from a law firm detailing actual versus budget profit and loss analysis.

After many months, the lender unsurprisingly lost patience and the partners have had to provide full security to cover the overdraft facility, in order for the bank to continue its support.

Increasingly banks want far more financial information on a regular basis in the form of annual budgets, cash flow forecasts, projected profit and loss and balance sheets, aged debtors and creditors, details of HP, lease and other loans, levels of unbilled and unpaid disbursements, the split of work (which helps to assess if the firm is too reliant on one area of work or one particular client), and updated partner asset and liability profiles.

And, in some cases, the banks are now trying to secure previously unsecured borrowing.

Whilst we all agree good practice and financial management is a good idea, is it really happening within your firm?

And if so, is it being reviewed and updated regularly? It is an absolute necessity for any business, not just legal practices, to have sound financial processes, procedures and systems in place.

Work in progress (WIP) must be turned into bills, and those bills (debtors) must be collectable. A firm’s ‘lock-up’ (the amalgam of your WIP and debtors) should be targeted to be no more than 120 days.

Whilst I accept this is not possible in all litigation casework it should be a key objective for legal practices.

When we do see an economic recovery and your firm starts to increase the level of work taken on, it will be essential that you manage your bank’s expectations and inform them of your need for additional cash resources.

Work taken on will result in an increase in your wage bill, a build-up in your WIP and eventually a build-up of debtors but when will you actually see the cash?

A recommended and simple discipline is to create a 13-week cash flow forecast and keep this up to date. It will help to manage your bank’s expectations and demonstrate you are in control of your finances.

It is essential to remember that more businesses are likely to fail through overtrading without financial resources as we come out of this recession, than we have seen going into or during it.

Viv Williams is Chief Executive of 360 Legal Group