FINANCIAL MANAGEMENT: slow billing processes hamper fee collection, reports PwC

Profitability at the largest solicitors' firms is falling, a survey of top practices' financial management has claimed, exacerbated by worsening fee collection which is costing partners in large firms around 4,000 each.

The annual survey by accountants PricewaterhouseCoopers (PwC) found that 47% of the top 25 firms, and 48% of the top 50, saw profits dip in 2003.

'This is a marked reduction in profitability trends when compared with recent years,' it said.

Only 59% of the top 100 firms increased profits in 2003, compared to 68% in 2002 and 81% in 2001, indicating that firms of all sizes are struggling to maintain profitability.

However, it also said that firms outside the south-east 'are reporting greater improvement in profitability'.

Profit margins are also being squeezed, with only half of the top 50 firms achieving margins in excess of 30%, down from 50% in 2002.

Banking and insolvency were identified as the areas with the highest profit margin, with IT and private client the lowest.

Nonetheless, 24% of the top 25 firms continue to generate profits per equity partner in excess of 500,000, and 18% managed more than 750,000.

The survey highlighted a failure to control staff costs as a problem for many firms.

Another major issue was fee collection.

The top 25 firms took an average of 76 days to collect fees owed to them in 2003.

Some 84% of the top 100 firms took more than 60 days and, of these, 30% took more than 90 days.

It said the problem was exacerbated by slow billing processes within law firms, although this area has improved slightly since 2002 - 36% of top 100 firms billed nearly one-third of their 2003 fees in the last three months of the year, down from 45% in 2002.

According to the research, for a firm with 100 equity partners and billings of 100 million per annum, carrying debtors of 90 days rather than 60 days results in an annual funding cost of more than 4,000 per equity partner.

PwC said insufficient financial management steps are being taken by firms before a client engagement is accepted.

The survey said 43% of the top 25 law firms do not routinely undertake credit checks as part of their client acceptance procedures.

Peter Buckle, head of PwC's receivables management group, said: 'Firms are paying more attention to working capital management, but fee collection remains a costly area of weakness.

'There seems to be an unsubstantiated and outdated perception that pro-actively managing cash collection will somehow undermine client relationships.

Better-performing firms approach debtor management as an extension of client service, identifying issues early and communicating effectively to facilitate prompt payment.'