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The SRA's evolving requirements
The SRA has signalled action on financial oversight, with proposed changes including mandatory accountants' reports for all firms, use of third-party managed accounts, new rules on excess funds returns, restrictions on fees in advance, and potential requirements to separate COFA and finance manager roles.
At their recent compliance conference, the SRA Chair stated explicitly that regulatory changes have not gone into the very long grass, so firms should keep watching this space.
Critical warning signs
- Drawings exceeding profits
When partners are physically taking more out of the business than their profit share would otherwise have been, this cannot be right over a medium or longer term.
- The overlooked office account
While firms obsessively monitor client accounts, office accounts receive far less attention. It's concerning how many law firm managers don't even know how much money is in their office account right now, never mind whether that's been reconciled.
The 13-week rolling cash flow: an early warning system
The single most important financial management tool is a 13-week rolling cash flow forecast - the accountant's answer to financial stability monitoring.
Why 13 weeks?
- Captures quarterly transactions (rent, VAT payments)
- Provides actionable timelinessufficient warning to implement fixes
- Maintains reasonable accuracy unlike 12-month budgets
If a financial review shows figures to be bad, firms have 13 weeks to fix it. It is recommended that updates should be weekly, constantly maintaining a three-month forward view.
Understanding reporting accountants' limitations
Many firms misunderstand what reporting accountants actually do:
- Client account only - they don't examine office accounts
- Sampling basis - they don't review every transaction
- No financial stability assessment - they're not evaluating overall viability
Many firms believe their reporting accountant will have looked at everything and confirmed it's satisfactory, but it is doubtful that this is actually the case in most instances.
Interestingly, Scotland's Law Society employs specialist reporting accountants who systematically review all firms - a model providing far greater oversight than the England and Wales outsourced approach.
Balancing client interests with financial realities
When matters exceed estimates, firms face difficult decisions between billing targets, client expectations, and professional obligations.
Surprisingly, formal cost assessments under the Solicitors Act 1974 often validate 80-90% of disputed fees, demonstrating that proper work is generally recognised as reasonable.
The Mazur impact
The Mazur ruling prohibiting legal executives from conducting reserved litigation activities exemplifies how sudden regulatory changes threaten financial stability.
Very lean and clever firms will adapt, but the transition creates genuine financial pressures; yet most firms are likely to be very loathe to self-report potential insolvency concerns to the SRA.
Best practices for financial sustainability
- Implement 13-week rolling cash flow forecasts Update weekly, examining the figure 13 weeks forward.
- Reconcile office accounts regularly Match client account diligence - monthly minimum, preferably more frequently.
- Conduct monthly variance analysis Lexcel requires quarterly analysis; best practice is monthly, comparing current vs. prior month, same month last year, and budget.
- Disaggregate profitability data Break down by department, office, or team. Firms are likely to discover something about their business they didn't previously know.
- Verify all invoices Implement systematic checks - some firms still pay fictitious invoices.
- Choose qualified reporting accountants Ensure genuine expertise in legal sector compliance, not just lowest cost.
Looking Forward
The SRA currently collects minimal financial data: revenue, profit, and fee type percentages. There would be some logic where they start saying they'd like to know quite a lot more.
Despite economic headwinds - increased National Insurance, cost-of-living pressures, rising employment costs - opportunities exist through cloud-based tools, AI automation, and tech-savvy professionals. It was agreed that while there are lots of economic pressures, there are also lots of economic upsides, so the outlook needn't be entirely pessimistic.
Key takeaways
For managing partners:
- Implement 13-week rolling cash flow forecasts immediately
- Ensure office accounts receive equal attention to client accounts
- Prepare for increased SRA data requirements
For all firms:
- Financial stability isn't optional - it's a fundamental SRA principle
- Bad years are acceptable; not knowing about them isn't
- Forecasting and monitoring prevent crisis situations
Conclusion
The firms that thrive will view financial management as fundamental business intelligence, not a compliance burden. A 13-week rolling cash flow isn't bureaucracy - it's an early warning system.
Most importantly, financial stability challenges are acceptable. What's unacceptable is not knowing a firm's position or lacking systems to identify problems while there's time to address them.
The message is clear: hope is not a strategy, and ignorance is not an excuse. Firms should implement robust financial management practices now, before the SRA makes them mandatory or before financial instability makes them irrelevant.
