Lambert Chapman LLP’s Richard Thomson looks at the importance of cash

A few weeks ago top 20 Accountancy firm Vantis entered administration to be followed on 20 July 2010 by Top 50 law firm Halliwells. Both businesses have been sold by the administrators and will therefore, in some sense, survive. However their failure should be a warning to all businesses, especially professional firms.

Before entering into administration, both firms had substantial sales. Reports suggest Haliwells revenue in 2009-10 was in the region of £87m. Forecast fee income in 2010-11 is £105m.

Big firms entering into administration in this way clearly demonstrate the danger from poor cash management. Increasing turnover, large contracts and one off assignments may appear appealing but unless they translate into cash they may put extra burden on the business. Additional costs, such as ongoing expenses from entering into obligations during better times, can soon become a business’ downfall as times get tougher.

Press reports suggest that one of the reasons behind Halliwells failure was a significant increase in operating costs caused by the company entering into property obligations during recent years. Subsequently, transaction activity failed to cover the increased costs resulting in increasing pressure on cash flow.   

The danger of failing to manage cash flow correctly is of concern to all businesses. We recommend that good cash management is central to the business and future cash requirements and commitments are carefully managed.

Please contact your local Lambert Chapman partner if you would like to discuss the key cash management issues in more detail.   

Date:23 July 2010