Business cards
Work out how much cashback you could earn.
The key to cash
Six steps law firms can take to unlock working capital.
Read time: 6 mins Added: 15/05/25
Spring 2025 marks the first anniversary of HMRC’s Basis Period Reform and the end of the subsequent transition period. The simplification of tax rules for unincorporated businesses has represented a significant shift in the way that firms in the Professional Services sector calculate their profits. 31 January 2025 marked the first accelerated payment, which has started to increase working capital requirements. As a result, many firms are still wrestling with the financial consequences of the reform.
Firms in the sector initially pledged to focus on optimising working capital, but a high number have still yet to reap the benefits of optimisation. Some have instead turned to bank debt to plug the financial hole. While this appears to be a simple solution, optimisation is far more efficient. For example, it’s estimated that if law firms could release £20 million worth of working capital, then they could save up to £1.2 million per annum (data sourced by Lloyds based on the latest SONIA rate plus approximate pricing).
Basis Period Reform essentially accelerated tax payments for law firms. As a result, businesses will no longer have the same level of member reserves on their balance sheet to fund working capital.
Jessica Armstrong Head of Professional Services, Lloyds Corporate & InstitutionalCash stays king
Basis Period Reform changed how certain businesses work out their profits. It switched from basing profits on the accounting year ending in the tax year, to basing them on the tax year itself – regardless of their accounting date. Ultimately this has left firms with less capital on their balance sheets.
“Basis Period Reform essentially accelerated tax payments for law firms,” said Jessica Armstrong, Head of Professional Services at Lloyds. “The Professional Services sector has been particularly affected, due to their reliance on time as their primary commodity. As a result, businesses no longer have the same level of member reserves on their balance sheet to fund working capital.”
So, which six steps can law firms take to both optimise working capital and unlock trapped liquidity?
Step 1: strengthen payments infrastructure
Reviewing and improving payments infrastructure is a straightforward way to drive efficiency, reduce costs, and optimise working capital. Payment innovations made possible through the implementation of Open Banking technology, for example, represent an efficient way of boosting working capital, with firms gaining faster access to the money they are owed.
Lloyds’ Embedded Payment solutions offer the ability to remove friction from the payment journey. Our API-based solutions make it easier for a firm’s clients to pay them, help to accelerate the receipt of funds, and allow firms to automate outbound payments. Other solutions, such as Event Driven Notifications, for example, offer push notifications of credits and debits to an account, allowing the business to be faster and more agile when managing cash flow.
“Automation is the engine of efficiency,” said Brian Owens, Director, Transaction Banking Solutions at Lloyds.
Lloyds’ Embedded Payment solutions can help firms remove the manual operations from their payment processes, increasing speed and efficiency and reducing their working capital cycle.
Brian Owens Director, Transaction Banking Solutions, Lloyds Corporate & InstitutionalStep 2: review treasury structures
Focusing on transparency across the business’ treasury structures is a crucial step in optimising working capital and enhancing liquidity and yield. By reviewing treasury structures, firms can help improve visibility and, as a result, control over liquidity. As an experienced banking partner, Lloyds can help in navigating a business’ treasury structure to improve efficiency and unlock otherwise trapped working capital.
The introduction of liquidity structures – including tools such as sweeping and pooling – can also improve an organisation’s financial efficiency. These tools can make sure that cash is where the treasurer needs it to be, when they need it.
It’s also important to focus on cash concentration across the business, consolidating cash balances from different accounts into one centralised account. In turn, this can help ease working capital requirements, reduce the dependency on bank debt, and improve financial visibility across the business.
Step 3: support cash trapped overseas
For firms working internationally, working capital can become trapped overseas. One effective way to remedy this is by using Promissory Notes. Promissory Notes are financial instruments that allow law firms to accelerate receipt of money by up to 12 months, providing immediate access and improving liquidity.
By issuing a Promissory Note through a local bank, the overseas counterpart can promise to pay the relevant amount to the business at a future date. The law firm can then present this Promissory Note to Lloyds, where we’ll discount it and advance the cash to the firm on day one, depending on the appetite of the foreign bank the Promissory Note may be drawn on. This process not only guarantees payment from a UK bank, but it also simplifies and accelerates the repatriation of money.
Using Promissory Notes can significantly enhance a firm's working capital position while obeying local regulations around fund repatriation. As a result, they are a cost-effective alternative to traditional financing options.
Step 4: instilling a cash culture
Part of optimising working capital falls under human responsibility, so implementing a culture of rigour and timeliness can help to maximise liquidity. On the receivables side, making sure that there are processes in place to monitor collections, track slippage and identify emerging trends can help to guarantee that the firm receives payment for its invoices in a timely manner.
On the payables side, effective actions include overhauling internal supplier payment processes, improving the timing of supplier payments and making sure that the most efficient payment methods are used.
Embracing business-wide financial discipline is crucial. At Lloyds, we can help firms install treasury policies and ways to manage foreign exchange rates, which can help give better visibility over financing costs and working capital.
Step 5: dive into data
By strategically using data and analytics to assess different business functions, a firm can increase visibility, anticipate payments, identify more easy ways to optimise working capital and diagnose cash flow challenges. They can also use the data to benchmark the business’ financial health against that of its competitors.
Step 6: find working capital financing solutions
To help unlock working capital and improve liquidity in situations where cash flow is constrained, Lloyds offers a range of financing solutions. Working capital finance can unlock working capital by extending and unifying payment terms, potentially increasing liquidity. Additionally, such financing solutions can help firms improve the balance sheet, offer access to early settlement discounts and generally streamline the payment process.
Supply Chain Finance agreements allow firms to delay payment, while at the same time supporting suppliers through the prompt payment of invoices by the lender. For a law firm, this can have a significant impact on working capital. Expenses incurred by the firm, including IT and technology, outsourced PR and marketing, administrative expenses, rent, utilities, and stationery, can all be subject to supply chain finance agreements. As a result, these expenses all represent opportunities to improve the firm’s working capital cycle.
Additionally, Receivables Purchase is a powerful funding tool to help law firms looking to improve their working capital position. Receivables Purchase allows firms to accelerate payment for their invoices, providing immediate access to the funds owed at a discount. The bank assumes the credit and collection risk, while the firm benefits from access to liquidity to help ease cash flow challenges.
Lloyds also offers a range of Commercial Card solutions that extend Days Payable Outstanding (DPO) by up to 60 days, maximising cash flow within the business. By integrating a card payment strategy into existing procure-to-pay processes, firms can release the supplier payment at a time of their choice. This can enhance their working capital position, achieve an earlier settlement discount from suppliers and improve payment compliance with their preferred supplier’s policies.
Our solutions can help firms meet their short-term needs, while ultimately supporting their long-term growth.
Mansour Davarian Head of Transaction Banking Solutions, Lloyds Corporate & Institutional“Lloyds’ working capital-focused financing solutions offer firms faster access to the money they’re owed,” said Mansour Davarian, Head of Transaction Banking Solutions at Lloyds. “This reduces the risk posed by late payments or non-payments, and provides firms with greater flexibility. Our solutions can help firms meet their short-term needs, while ultimately supporting their long-term growth.”
While Basis Period Reform has accelerated tax payments and put pressure on working capital, there are technological, data-driven, cultural, and financial solutions available – especially in the field of cash management. For more information on Lloyds’ solutions, get in touch.
Let's help you get to the right person
Get in touch with a specialist who can help with your business needs.
You may also be interested in:
Improving the protection of client money
How law firms can handle client money smoothly and efficiently.
Professional Services
A comprehensive banking proposition for professional service clients in the UK and US.
Market Insights Weekly
Stay ahead of upcoming economic events with our weekly look-ahead report.
Keep up to date on LinkedIn
For the latest insights follow our dedicated LinkedIn channel for corporates and institutions.