Prudent law firms are putting much more money away to make their businesses more resilient if they run into problems, a new survey has revealed.
An annual benchmarking report, prepared by NatWest, asked 269 firms of various sizes for insights into their financial performance and reserves at the end of 2016.
Firms reported a median figure of £94,000 in the bank at the year end, up from £54,000 at the end of 2015. The report found regional variance, with a London median of £355,000 and just £53,000 in Wales, Midlands and East of England.
Robert Mowbray, the author of the report, said the results showed that firms appreciate the importance of keeping money for the worst case scenario.
‘Not making a profit is unlikely to cause the collapse of a firm in a hurry but running out of money can cause immediate failure,’ he said. ‘All firms should therefore monitor their bank balance at all times and prepare regular cash flow forecasts to make sure that they can live within their agreed bank facilities.’
Mowbray added that law firms traditionally do not feel comfortable with too much debt, although the survey found around a quarter of firms were overdrawn at the year end.
Firms are also getting better at reducing the time taken from the recording of an hour to the billing of that hour.
The total median figure for work in progress is 50 days, down from 56 days a year before.
Smaller firms clear their WIP more quickly, as do firms in the south-east, where WIP is a median of 31 days compared with Wales, Midlands and East of England where it takes 73 days.
Despite improving performance in this area, Mowbray said most legal businesses are still failing to manage lock-up effectively and providing too much credit to clients.
With lawyers preferring not to borrow money, the consequence is that firms often require capital from the partners and there is some delay between generating and distributing profits.
The median profit per equity partner was £120,000, which was £9,000 higher than the figure reported 12 months previously. The median profit margin dropped to 23%, a sign that growth is stemming from an increase in volume rather than increase efficiency.
The survey is the latest to highlight the vulnerability of law firms to computer crime, with 24% of practices experiencing a fraud-related loss or cyber-attack in the last year, with larger firms more likely to be targeted.