Finance and Funding Update for Legal Practices
Achieving the optimum level of funding in a law firm should enable that firm to mitigate risk, effectively manage cash flow and flourish and grow to achieve its long term goals.
Our review saw total funding per equity partner remain static or decrease in the majority of firms, continuing the overall trend from last year. Only the smallest firms saw an increase in total funding with a significant increase from £25,000 to £48,000.
The most dramatic reduction was seen in the firms with over 25 partners, decreasing from £139,000 in 2018 to only £70,000 in 2019.
In or out?
All other firms saw increases in bank borrowings and in the percentage of total funding from external sources. Many firms are using the current economic climate to renegotiate, and frequently increase facilities with their existing providers on favourable terms with interest rates and fees remaining static at worse.
Funding from external sources continued to reduce in the largest firms, following the pattern set over recent years, with a reduction from 32% to 18% in 2019, the lowest level in four years.
All sizes of firm in our review showed a decrease in the actual capital invested in the year, likely to be a reflection of both the continued reticence of senior fee earners to make the jump up to partner and also having more junior partners in place with lower levels of required capital.
Financing is no longer required simply to pay distributions to partners, firms need to have agile funding solutions in place to ensure they are well placed to take advantage of any market opportunities and to be able to adapt to the ever changing economic conditions.
What does the future hold?
Law firms are seeing ever increasing demands on their finances, such as investment in IT and technology, the need to retain and motivate key staff and investing in work places of the future, whilst still maintaining the expected return to partners.
Call to action
- Consider reviewing your existing facilities to ensure you have the most favourable terms available.
- Investigate the possibility of using alternative sources for funding as there are increasing numbers of specialised law firm financiers now competing.
- Review your current cash flow forecasts – are they adequate and accurate?
- Do the forecasts include all possible projected costs, outgoing partner payouts, early retirements, investment in infrastructure?
- Consider the future objectives of your firm, and the related funding required to achieve those goals; are you looking to acquire fees, expand into new markets?
Find out more
This article comes from our latest Legal Benchmarking Report. This annual report draws insight from legal practices across the UK and focuses on some of the pertinent issues and trends in income, profitability, employment costs and lock up
Click here to read a copy of the full report.