Turning a Crisis into an Opportunity

Background

Case StudyManagement of my legal sector client expected to be significantly impacted by the global lockdown restrictions imposed by the government as a result of the Covid-19 pandemic. They believed that fees could be dropped by as much as 60% and did not have the necessary tools in place to track the impact to the business in order to take corrective action.

Challenge

My challenge was to identify and put into place key performance indicators (KPIs) that could track the impact to the business and the working capital components to ensure the business had enough cash for the next 12 months.

In the first instance, two new cash flow models were built – the first looked at a rolling 13 week cash flow to allow the team to manage the day to day impact of Covid and allow focus on cash collection; the second model was long term and looked out to 18 months. The models were stress tested at 5% cash collection increments so that we could understand the potential impact of cash collections dropping. It also aided the team to understand the minimum monthly cash collection target.

The models were linked to a weekly instructions KPI which provided a good indication of future billings and therefore determined demand. The business was able to see that Covid had a 30-40% impact on future billings. This information was used to predict future cash flows. Prior to this the business looked at cash flows on a monthly basis and whilst moving to a weekly forecast involved more work, it enabled the firm to become more agile and adapt to the impact of Covid.

The next phase was to create weekly KPIs for the business to track the working capital flow of the business. One of the most important ones was “New Instructions Received” – we were able to track this on a weekly basis and compare to pre-March levels to understand the impact to the business. This allowed us to anticipate future billings and collection levels.

Outcome

The objective of these actions was to protect the long-term future of the business and its staff. At the outset the owner was adamant that they did not want to place the business into a debt situation and refused to discuss the possibility of taking out a Bounce Back or CBIL. My remit was to change the way we measured the business from a monthly basis to a weekly basis and adapt the KPI’s accordingly, so that we could almost track the changes in real time. By making some quick sacrifice initially, it gave the business more time within cash reserves and allowed the firm to adapt to the financial conditions, to come out of the first lockdown leaner, stronger and most importantly debt free.

The firm experienced a classic V curve on New Instructions and Billings which saw them drop by 40% in the first months of lockdown. Subsequently the firm experienced a big pick up of business as places began to reopen. However, the immediate downturn focused minds on cutting costs to help cash flow. We focused the team on measuring activity levels, billing levels and instruction levels to understand the demand from the market place. We then aligned the resource to address the supply capacity to meet demand and ensure we did not have any excess cost in the model. This enabled the business to continue to produce positive EBIT and cash.

The models detailed the expected cash receipts over the short and long term as well as the benefit of savings through the furlough scheme that was implemented. The key overhead cost centres that we were able to reduce were salaries (staff were placed on a 4-day week and some staff were  furloughed/made redundant); business development/marketing (historically business development activities were focused around physical networking events such as conferences); travel and property where a rent reduction and renegotiation of future lease arrangements was achieved. Other vendors were asked to take a 20% reduction in their fees to improve cash flow.

KPIs

The most significant change was moving our KPI and performance analysis from a monthly cycle to a weekly cycle. Whilst the firm had historically recorded new instruction levels, it had never used them as a KPI until I advised that they could provide a useful early indicator of future receipts to the business. Our monthly KPI’s such as WIP & Debtors (cash locked up), cash at bank, billings, cash collections and performance utilisation rates were all changed to weekly KPI’s and in conjunction with the new instructions KPI, allowed the firm to have a complete picture of the financial operational cycle.

Solutions

As the senior finance person within the business, it was my responsibility to support the Partners and ensure they did not make decisions that could damage the long-term prosperity of the firm. To do this, it was important to create timely and regular business information on a weekly basis, but also to overlay this with longer periodic data to create context. As the Partners could see the business information correctly predicting outcomes, they grew more confident in the recommendations that were being made.

Benefits

By acting quickly, the firm were able to protect the long-term future of the business and its people. The Partners have a far better appreciation of KPI’s and working capital than they did before Covid-19 and understand the importance of cash flow forecasting.

We were able to protect the business from the global financial impact of Covid. Whilst some sacrifices had to be made, they were done in a pro-active manner rather than re-active, to protect cash flow. We were able to protect many more jobs because we had a supply and demand model that allowed us to understand what was required to achieve this.

The Client is relieved that we were able to navigate the first lockdown and although we are unsure what the immediate future holds, they are confident that we’ve created a strong platform to build for growth in the future without incurring any financial loss or requiring any additional financial assistance because we have cash headroom in the business for the next 12 months. More importantly, all staff have now returned to full-time and the firm has significant levels of new business and WIP to get through over the coming months.

EFM Expert: Alan Dye