Leadership Exchange - April/May 2013 - (Page 32)

MARCH LUNCHEON RECAP Manjit Ender, CLM, SPHR MEnder@fulpat.com 310-824-5555 “WORKING CAPITAL: HOW MUCH IS ENOUGH?” On March 12, 2013, at the Beverly Hills Country Club, Mr. Ron Seigneur, CPA, spoke during our Chapter Luncheon about working capital. More specifically, how much is enough? For those 27 members and guests that were able to attend the presentation was both informative and insightful. Given the current economic climate, what administrator would not jump at the chance to learn tips about fiscal management for working capital and prudent debt management? With over 30 years in the legal management field, Ron is very active nationally as an educator and author of valuation science and has written and taught advanced level valuation courses in several states for the AICPA, NACVA state bar associations and the Environmental Protection Agency. Ron is an author and lead instructor of the Association of Legal Administrator’s national Essential Competencies training program for financial management. Whether you were new to fiscal management in law firms or a seasoned expert looking for new valuation methods, Ron’s presentation had enough content to satisfy many varying levels of knowledge. The discussion began with some alarming headlines that made the news over the last few years, such as: • Howrey Cuts 25 Staff, Seeks Capital from Equity and NonEquity Partners • Dewey Raises $120 Million in Bond Offering • Hammonds Debt Crisis Forces Cash Call What do all the above headlines have in common? Tough economic times can require increase working capital needs for law firms. A TURBULENT AND EVOLVING ECONOMY CAN REQUIRE INCREASED WORKING CAPITAL NEEDS Before any heavy fiscal evaluation of working capital can be discussed, Ron first began defining what is working capital; and more importantly reminding everyone of the balance sheet equations we all should have ingrained in our mind: Assets = Liabilities + Owner’s Equity. Owner’s equity equals a partner’s capital contribution to their respective firms. Working capital is defined as the difference between current assets and current liabilities. Firms need adequate working capital to meet short term cash requirements, such as paying current debt and advancing business plans. Another important equation is the current ratio, which is current assets divided by current liabilities. This ratio is widely used by lending institutions to evaluate a firm’s fiscal liquidity, and most require a firm maintain a ratio of 1 to 1 during the term of the loan arrangement. With the basic understanding 32 of working capital completed, the discussion moved to an analysis of working capital to meet the needs of firms. EACH LAW FIRM WILL HAVE UNIQUE ISSUES AND CONSIDERATIONS Each firm will be unique in terms of how much working capital is required, but Ron suggests more often than not many firms are undercapitalized. The strategic importance of having adequate capital will affect a firm’s ability for growth (more attorneys, more infrastructure, new offices), keeping pace with technology, and the evolving law office to name a few. Another point made in attempting to sustain working capital is that pricing and collection trends stress the cash flow of law firms. Law firms must ask themselves if their capital position is sufficient to weather adverse economic conditions or unexpected circumstances, including malpractice claims, departure of key rainmakers, or off balance sheet obligations. Ron also pointed out that misfortune can create opportunities for fiscally sound law firms. As firms fail, talent becomes available and opens the door for lateral prospects and geographic expansion, including acquiring offices. This begs the question as to whether your firm would rather be acquired or does not do the acquiring. PREPARING FOR THE TRANSITION TO THE “NEXT GENERATION” OF PRACTICE LEADERS AND OWNERS The current economy coupled with a new generation of lawyers have created a different standard than years prior on what minimal amount of firm capital or “skin in the game” each new member of ownership must contribute: as little as $20,000 compared to $100,000 previously. Different gradients are now common practice in law firms and are a sign of the times. For example, a senior partner near the top of the firm’s compensation scale will be required to have a larger investment in place than a new associate entering equity partnership. What are sources of permanent capital and working capital was next on the agenda. Some sources discussed were cash from partners (withheld over time or lump sum), debt, inventory of WIP and A/R. As it turns out, there are also opportunities to accumulate capital without making drastic financial changes by simply doing a better job in the collection cycle. Setting a goal to decrease even a few days in accounts receivables can generate unexpected cash in the thousands which could be used toward working capital. There are a few simple tools law firms can apply to determine the proper amount of firm capital necessary to remain solvent and viable into the future. Financial managers at law firms should create a process of analyzing and projecting needs based on current circumGreater Los Angeles Leadership Exchange

Table of Contents for the Digital Edition of Leadership Exchange - April/May 2013

Leadership Exchange - April/May 2013
Table of Contents
President’s Message
Editor’s Message
Monthly Calendars
2013 Event Calendar
ALA Webinars
ALA Social Media
Community Connection News
Diversity Upfront
The I-9 Gets a Make-Over
ALA Management Encyclopedia
Accept the Challenge to Become a Green Lawyer
CLM Corner / Crossword Puzzle
CLM Study Session
CLM - Steve Wingert
GLA Making News
Volunteer of Year
Annual Chapter Meeting
A Law Firm's Marketing Success Story
GLA ALA Essay Contest
March Luncheon Recap
CLM Crossword Puzzle Answers
Member/BP Mixer Recap
Board of Directors
Region 6 Officers
Board Update
Board Crossover Meeting
Does Your Law Firm's Technology Meet Ethical Requirements?
Coach’s Corner
ALA Past President's Reception
New Members & Member Updates
Members In Transition
2013 Compensation and Benefits Survey
Business Partner Spotlight
"Green" Ideas

Leadership Exchange - April/May 2013