Years of enhanced partner distributions and ‘lean’ approaches to cash management have left leading firms vulnerable to financial shock, a review of leading firms’ accounts reveals today. Out of 40 LLPs studied, 55% had insufficient cash on their balance sheets to cover one month’s operating expenses; 38% would not be able to meet one month’s salary bills.
The review was based on the publicly available financial accounts of the top 40 UK LLP law firms by revenue that report on a consolidated basis.
According to the study, published by Augusta Ventures, a litigation funder, leading firms have refined their balance sheets over time to enhance partner distributions and manage cash balances as efficiently as possible. 'This lean aproach to cash management was hailed as markedly improving the operating efficiency of many law firms during periods of market stability,’ it notes. 'However it has also left balance sheets arguably undercapitalised to deal with a prolonged financial shock.’
The impact of Covid-19, including a decline in deal-flow and an increase in receivables and unpaid invoices, provides just such a shock. Author Andrew O’Connor concludes: 'The rate of cash burn experienced by law firms during this period will place significant strain on balance sheets.’
Last week research by the Law Society suggested that the future of thousands of high street firms could shut within six months because of financial pressures as a result of the crisis.
*The Law Society is keeping the coronavirus situation under review and monitoring the advice it receives from the Foreign & Commonwealth Office and Public Health England.