Almost half of small and medium law firms believe profit will grow by up to 10% this year, a new benchmarking survey has found.

The report from NatWest and RBS, released today, found significant optimism amongst UK firms for the coming year – despite some rivals failing in 2013.

More than 90% of the 380 firms that responded to the banks’ survey believed their profits would grow or at least remain the same in 2014.

And just 30% predicted that work in progress will reduce, with the majority (62%) forecasting that bank balances will improve in the next 12 months.

Steve Arundale, head of professional sectors for NatWest, said: ‘Last year was another challenging one for the legal sector, however optimism seems at an all-time high with some great performances recorded across the country.’

Analysis of firms’ financial results show a 7% increase in profit from 2012, with smaller firms (those with less than £1.5m annual turnover) reporting a 15% rise.

Fees also increased in 2013 with an average of 3% growth.

But Arundale said firms should still be aware of the dangers that face them around cashflow, pointing out that many of the firms that failed last year were profitable.

He added: ‘Lawyers continue to struggle to understand the relationship between profit and cash.’

The report details that the vast majority of legal businesses fail to manage lock up (unbilled work in progress plus debtors excluding VAT) effectively and provide too much credit to clients. This in turn forces firm to require capital from partners.

Larger firms reported an average of 138 days of lock up, with smaller firms reporting 87 days.

The report added: ‘Firms fail when they run out of money. Not making a profit is unlikely to cause a firm’s immediate collapse, but running out of money can cause immediate failure.

‘All firms should continually monitor their bank balance and prepare regular cashflow forecasts to ensure that they can live within their agreed bank facilities.’

But the majority of law firms have money in the bank: the median bank balance was £20,000, which the report suggested they should invest as economic growth takes hold.