Funding blueprint: Improve your relationship with your bank

 

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Key takeaway points:

1. Law firms are no longer viewed by banks as copper-bottomed and so need to change their attitude toward their banks.

2. Before engaging with your bank, there is crucial internal groundwork that must be undertaken to engender confidence in the firm. Banks will expect evidence of comprehensive business planning, with clear business objectives.

3. When making a funding request, always be conservative. Focus on ensuring projections are realistic, based on reasonable assumptions, and factor in some headroom for margin of error.

4. Do not keep your bank at arm’s length; ongoing communication is key. Always agree clear timescales on what is required on both sides. If possible, include the bank in your business planning process.

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The relationship between banks and law firms has changed significantly since the onset of the recession. It’s been said that banks like handing out umbrellas when it’s sunny, but not when it’s raining. But, have law firms given banks every opportunity to hand out umbrellas in inclement times? My view is probably not; this has largely been exacerbated by an outdated law firm view on how relationships should be handled with funders in a modern legal market.

We’re now in a market subject to fierce competition, excess supply, aspirations fuelled by significant growth in lawyer earnings over the past 20 years and variable client demand for better services. As a result, law firms are no longer viewed by banks as copper bottomed – and rightly so. We criticise banks, both in terms of the economy as a whole and also within the legal sector for becoming more risk adverse and less happy to lend without restriction or potential consequence. Frankly, the onus is on us to change this mindset.

At SGI Legal, we’ve deliberately set out to treat our bank, NatWest, as an additional board member and work closely with our banking relationship manager Andrea Kelly. There are a few fundamentals of having a healthy relationship with your bank which engenders confidence in other funders to invest in your law firm in future. We believe that our strong banking relationship started with our internal approach. Even before we engaged with Andrea, a great deal of time and effort went into our own business planning and setting out clear internal objectives. This is crucial groundwork that must be in place before you even meet your funder.
Meeting a bank without this is a recipe
for disaster.

Laying the groundwork

We took a top down and bottom-up approach to laying the groundwork for financing. From the top down, we are constantly focused on producing robust medium to long-term forecasts, based
on agreed business and financial objectives. These objectives are owned by the board and everyone within the business is made aware of what they are and how they apply them.

Equally, these objectives are reviewed and performance is challenged on a regular basis to ensure ownership and accountability. We proactively produce and publish weekly internal key performance indicator (KPI) reports. Senior staff have access to a bespoke live dashboard, which I developed with our IT team. As a result, objectives can be reviewed formally on a monthly basis.

The bottom-up approach comes from the fact that the base for these objectives is significantly underpinned by the data we capture from our case/practice management system. This data is not simply focused on fees billed, cashflow and profits at a firm, department or individual level. We capture data around leads to case conversion rates by source or work type, timescales to specific milestones on a file and what stage a litigious file is currently at. These, in turn, give us visibility, with a good level of certainty, in areas such as current team capacity, future resource requirements and short to medium-term revenues.

While we may, and do, have a number of objectives around achieving a certain financial outcome, it is of critical importance that the objective details how we will get there. Therefore, we focus a significant amount of our data capture on what we believe drives our objectives. The outcome is crucial as it manages the key question of why we would pursue a particular objective.

For example, the answer may be for diversification or to increase investment in one area in preference to another, or embarking on a case acquisition strategy instead of or to supplement organic growth. The timeline we set out is specific, measurable, achievable, realistic and timed (SMART) to:

• ensure it can be measured (hence the need for good quality, focused data);

• avoid investment being wasted; and

• ensure issues are addressed promptly and efficiently.

Our objectives then underpin how we develop our system, what our case strategies are, what type of work we are looking for and how we deliver that work. Equally, being able to look at these drivers and their impact allows us to model how varying these objectives can influence our financial results.

We have invested a lot of time and energy in developing robust automated data capture around those key drivers, especially as the legal profession as a whole is forced to move away from hourly rate billing. This enables us to set objectives which are challenging but achievable and also to measure the financial impact on our fees billed, cashflow and profits.

Funding requirements

The next element we consider is what we are going to ask for from our funder. My advice and approach here is to always try to be as a conservative as possible in your funding request. We focus on ensuring our projections are realistic, based on reasonable assumptions from the information we have available. To that we also factor in some headroom for margin of error. I use, as a minimum, 10 per cent headroom (combined with realistic/ prudent assumptions) for any projections.

While objectives should always be challenging, it is important that we ensure our funding requirement is something we feel absolutely confident in remaining within. Again, consideration of this should give you and the bank confidence that what is being asked for can be achieved with reasonable certainty. Each time we are able to demonstrate this it hopefully delivers more confidence from our bank that we have a business that it feels comfortable investing in.

Equally significant, consideration should be given to short-term liquidity and increased risks to the bank for the promise of medium-term earnings for your members. This is not a great trade-off from the bank’s perspective. But, however painful it may seem, you will need to consider how to address this and ensure your commitments are delivered upon.

Winning support

From my perspective that is the ground work done. The next step is actually talking the bank through it all. How this is done is critical. It is very much about balance; you do not necessarily need to go into the detail, but you must be clear on what support you need and, more importantly, why.

While delving straight into the detail
is not the right approach, it is important that, if there is a detailed or specific question from your funder, you know the answer, as you have already considered that point. As part of any preparation I try to consider what the key issues are for the funder and ensure I can deal with these, much as you would with any investor in any industry.

I have seen too many instances of senior partners and board members talking to their bank about projections that they have little in-depth knowledge or understanding of themselves. Who presents the funding request is not really important; what is more important is ensuring the person(s) meeting with the funder have the requisite knowledge, as this builds confidence.

Additionally, you need to be able to clearly identify what your firm’s key drivers are so that you can reference back to this in future. As always, it is about balance; you need to be focused and concise but, equally, deliver the information that is critical to this key stakeholder.

In terms of our discussions with Andrea and the team at NatWest, we are clear in terms of agreeing timescales and what is required on both sides. We have ongoing projects which may potentially require specific individual funding in future. Therefore, we have included the bank’s team in our planning process and ensured they are comfortable with delivering feedback within agreed timescales on funding decisions.

We have to ensure they are equally confident as to the parameters of what we are looking for and the potential level of required funding. If an opportunity falls outside of those parameters, we are clear that separate discussions with our bank would be required before we can proceed with their support. This is something we accept and feel is a reasonable and practical approach.

Measuring returns

To date, this approach has led to a positive outcome for all concerned or, if not, an understanding as to why and what action is needed. If the decision is positive, then it is critical that we do not simply switch off or disengage with our bank. If anything, quite the opposite occurs as regular updates and concise and focused information needs to be exchanged on a regular basis to ensure the bank is kept in the loop.

Any information we supply, other than very basic data, is always qualified to identify key variances, both positive and negative. Also important is identifying why the variances occurred, what the impact has been and what action we are taking. This isn’t the easy approach but, equally, if our forecasts have been prudent and we have factored in some headroom, then as part of qualifying the information, we are able to reference this point.

Fundamentally, it is important to recognise that we are accountable for our performance to our bank, as an investor. As such, it has a reasonable expectation to understand what we are doing with its investment and why. This is much the same as the desire of any partner with capital locked into a business to influence what is done with his investment in the firm. Both parties share the risk of losing their investment if poor business decisions are made or a too aggressive strategy is pursued. It’s a win-win for
both parties.

Steven Evans is financial director at SGI Legal (www.sgilaw.co.uk)