When we analysed the findings of this year’s ALPMA/Crowe Horwath Financial Performance Benchmarking Study of Australian Law Firms, released in February, we found that while firms still see the marketplace as tough, there are plenty of signs of uplift.

The days of relentless cost-cutting across the board appear to be over, replaced by targeted cost savings and a greater focus on profitable revenue growth and improved cash flow.

A key component of the annual benchmarking study is a Financial Resilience Index, which brings the results together into a measure of firms’ financial strength.

What the index revealed this year is that law firms are getting more revenue from the resources and funding they have available, as seen by the higher resilience factor. Law firms have increased their resilience by 20.63 per cent over the past 12 months (excluding those with revenues of more than $20 million).

But how do you get to be a financially resilient law firm? And what are firms doing to become more financially robust, especially after the recent years of endless cuts and spending restraint?

Firms that show financial resilience share common characteristics. The index shows a financially resilient firm is one that pursues a range of initiatives to build a strong platform from which to pursue growth. It’s a firm that takes action rather than waiting for events to happen.

The following are the top six strategies adopted by financially resilient firms:

1
Improve cash flow and work-in-progress management
The study indicated that internal processes, including those for collecting cash, are improving. Lock-up days have decreased from 147 last year to 141 this year, which is borne out by comments from firms saying better engagement with clients is resulting in stronger cash flow, earlier collections and fewer days to bill work in progress.

2
Reduce debt
Firms that repay their debt decrease their reliance on funding, whether that be bank or partner-based. This frees up cash from the balance sheet for other, income-producing activities. However, be aware that less debt may indicate better cash flow, but less funding means firms have to be even more diligent in managing cash flow.

3
Find new blood
Lateral hires are perceived as a means to drive new business growth, as is the appointment of younger partners from within the firm. However, stiff competition for high-calibre partners and lawyers is tipping the balance of power away from firms to partners and lawyers. Firms will need to work hard to attract and retain staff.

4
Develop new business
Firms highlighted business development as a key investment for 2015, with building new referral networks and expanding into new markets both high on their agendas. This goes hand-in-hand with recruitment, as firms seek to employ specialists to create ready-made practice areas. In an already crowded market for legal services, such initiatives are likely to make the competition even tougher.

5
Execute well
All firms want profitable growth. The challenge is how to be in the right financial position to achieve this. The strength with which firms execute their strategies for growth – business development and lateral hire – will be the measure of their future resilience.

6
Be active
Most financially resilient firms actively review where they are now and where they want to be, and take action to get there. This reinforces what Crowe Horwath experiences when working with law firms to improve their financial positions. Financial predictability can only be achieved when a firm has clarity around its financial position.

The firms most optimistic about what 2015 will bring are striving to increase profitable revenue through a variety of measures. These initiatives are focusing not only on growing client bases and lateral hires, but also on reducing debt, improving cash collection procedures and engagement with clients.