Solicitors' Practices - Assets, Liabilities and Capital

The Peat Marwick report on the structure and finances of firms in private practice has been covered in the last two issues of the Gazette. This week we concentrate on the assets and liabilities of firms. The total projected net assets of all firms, after deducting long term loans, are £526 million.
The following chart shows the projected total assets of firms in 1985 as compared with the 1977 survey: (see chart in original)
The most noticeable changes since 1977 have been the reduction of cash balances and the considerable increase in overdrafts and loans, particularly long term loans. The marked increase in work in progress, debtors and prepayments may be due to a trend towards the bills receivable or work in progress basis for preparing accounts. Less than half of all firms account for work in progress and a relatively high proportion of firms (17%) still adopt the cash basis for their accounts.
The following tables show the net assets per firm and per principal but should not be taken as a representative balance sheet for any individual firm because the figures are averages and include those firms which include no value in their balance sheets for particular items. The average asset value per firm for property is low in central London because of a preference to rent premises. The average freehold and leasehold property held per principal is the highest in sole practitioners, £16,300, compared with an average per principal for all firms of £8400. (see tables in original)
Goodwill is included mainly in the accounts of firms with two to 14 partners. Very few sole practitioners or firms with more than 15 partners include it in their accounts and goodwill is not a significant asset even where it does appear. The average per firm is £2,800 (£19,300 excluding those firms not including a value for goodwill in their accounts).
65% of all firms operate on external financing from bank overdraft and short term loans and/or long term loans. The average of overdrafts and short term loans per firm is £32,500 and the average for long term loans is £63,200. In the smaller practices average external financing is greater in firms with over 30% of their fee income from criminal legal aid than the average for all firms.
The average ratio of capital investment to net profit for all firms is 70%, thus a principal is required on average to introduce capital representing 72% of the annual profit share. All sizes of firm are currently achieving a lower ratio of capital investment to net profit than in 1976.