Overdraft is a painful word in January, says Nick Sanders, but there are other ways to mitigate the cash flow difficulties of the New Year, such as tailor-made finance. Sound specialist advice is critical


For many managing partners and practice managers the after-effects of the festive season and New Year celebrations pale into insignificance when compared with the headache of balancing cash flow in January.



December, and its hazy recollection of events before the Christmas party, is not a typical month. It is unusual for all staff to take nearly two weeks’ paid leave at the same time. It is unusual to omit billing clients for two weeks. It is unusual not to receive any client payments for nearly two weeks, and it is certainly unusual to treat staff to a lavish party.



By contrast, January is a very typical month – well, except for the fact that only half of the staff started back on 2 January, with the others extending their leave until the following Monday.



Remember also that not only is VAT due at the end of the month, but this is also the month in which partners have to pay their income tax.



This demand on cash, albeit challenging, would usually be manageable – if December had not been so atypical, requiring the firm to incur its normal costs while billing and collecting less money than usual.



But there is no need to worry, as salvation in the form of a bank overdraft is just around the corner – or is it? Did you not read something over the Christmas break about a credit crunch, something to do with the Northern Rock bank, and about sub-prime mortgages in the US?



This tale of woe may by be overly simplistic, but for many it will resonate with their experience of managing cash in January. What is more, these issues are not limited to large firms. In fact, for many mid-tier and high-street practices the pressure on cash in January can be even greater.



Perhaps worst hit this year, though, are those firms that rely on the Legal Services Commission for payment. With its well-publicised payment problems, the commission, or perhaps more properly expressed its franchised firms, faced a bleak start to the New Year.



Not quite hair of the dog

So, is there a cure for the cash-flow hangover of an over-indulgent December and the excesses of January?



Well, maybe the answer is about ‘timing’ and ‘planning’. That is to say, for most firms the problems faced in January are not caused by a lack of profitability, but rather a mismatch between cash receipts and payments.



For some, the bank overdraft offers a solution by absorbing the seasonal peak in cash demand. However, among many firms there is a growing reluctance to rely on a facility that is by definition ‘on demand’, and therefore a fragile or unreliable form of funding. We are finding that law firms are increasingly looking for the reassurance offered by finance solutions that have been designed to meet their specific needs.



These types of solutions come in several forms and often have the benefit of fixed-rate interest terms,

letting firms accurately budget their repayment. Furthermore, these fixed-term loans offer the benefit of being supplementary to a firm’s existing bank overdraft facility, which is then available to meet the routine ebb and flow of cash as well as

any unforeseen short-term cash demands.



Of course, setting up specifically designed finance facilities requires a little more planning than simply relying on the overdraft to take the strain. Even so, most lenders make the application process easy and quick to complete. Once set up, these facilities can usually be readily renewed.



Beyond the overdraft

For example, you can now arrange a loan specifically designed to meet the cost of partners’ income tax liability. This can work by providing the firm with a term loan which is repayable over any period up to 12 months, and can either finance the January and July tax payments in separate loans or incorporate them in a single loan. The benefit of this arrangement is that firms can accurately predict the amount payable each month, making cash planning relatively simple and predictable. This type of facility is not just ‘fit for purpose’ – it is also highly flexible, with the option of scheduling payments to suit the firm’s cash resources. Most lenders will offer something like this.



Similar arrangements are also available for other recurrent costs, such as VAT payments. They typically work by providing the firm with a revolving credit facility, similar to the way a credit card account operates. The VAT payment can simply be charged to the account and the lender will usually make payment directly to HM Revenue & Customs on behalf of the firm. The amount of the monthly payment is recalculated, so that each new VAT payment charged to the account is repaid in equal amounts over the next three consecutive months.



If choosing the best type of facility to suit your specific financing need is important, then choosing the right lender is critical. While some lenders have developed dedicated divisions specialising in the professions, others have come and gone, often offering little more than generic ‘loan accounts’ wrapped up to look like something that they are not.



So hangover cures for cash-flow pains do exist. They are effective and, if used correctly, will help to alleviate future symptoms. But beware: not all types of finance are effective, so get specialist advice.



Nick Sanders is managing director of Key Business Finance, a professions-focused lending division of the Landsbanki Heritable Group