Firms count cost of management flaws

Law firms are failing to manage their cash properly, and are creating problems for their expansion plans as a result, a high-level survey claimed this week.The report into law firms' financial management by accountants PricewaterhouseCoopers - which included 46 of the 100 largest firms as well as a variety of regional practices - found that 65% had money tied up in clients, such as unbilled work in progress or uncollected money, for more than five months.

This is a 20% increase on last year.According to law management consultant Andrew Otterburn, this sharp deterioration in law firms' financial management will lead to growth problems.'By tying up a large amount of money in this way, it means that less capital is available for other areas, such as IT investment,' he said.

'If the firm wants to expand, they will have to increase their borrowing and further stretch their overdrafts, which will obviously place added pressure on the finances.'PricewaterhouseCoopers partner Alistair Rose agreed.

'Funding expansion is cheaper if you can finance it through existing funds from within the firm,' he said.

'If firms let billing and debt collection take a back seat, the cost of expansion will have to be met by external means, which are much more expensive.'Julia Balfour-Lynn, managing partner of London-based fraud firm Peters & Peters and a committee member of the Law Society's law management section, said the main problem that arose from bad cash management was wasted management time and unnecessary stress.

'Bad financial management can easily be avoided by forward planning, constant reviewing of cash flow requirements, and regular monitoring of billing and credit control,' she said.

Mr Rose added that training in key commercial skills such as selling and financial management could provide the answer.

'Only 38% of firms offer selling skills training and 53% commercial or financial training.

Given the likelihood of an economic downturn, these skills are increasingly important if firms want to improve the management of their finances.'The survey also found more positive news in that 71% of firms - 81% in the top 100 - reported a growth in profit compared to the previous year, and 14% achieved average partner billings of more than 1 million.

Staff costs also went down from 71% of fees billed last year to 66% this year, though this was caused by higher volumes of work and increased charge-out rates rather than curbing staff costs.Staff costs may have gone down, but the survey showed that turnover has not improved, with the top 100 firms seeing 15% of staff leaving.Family-friendly policies seem to have had little impact on the majority of firms, with just 14% offering flexible working hours and 9% career breaks.

By Victoria MacCallum