Law Firms Lock Up
Lock up continues to be the hot topic for law firms. The amount of cash tied up in either work in progress (WIP) or debtors directly impacts the ability of partners to draw profits and can threaten the very existence of firms. Cash remains king in professional service firms, with poor cash flow being the largest contributor to the failure of firms in recent times.
Lock up represents work in progress not yet billed and debtors not yet collected, effectively the amount of cash that could be available for use in the firm. This issue is exacerbated in legal firms, as the majority of overheads incurred by firms are fixed and have to be paid out regardless of work completed. Suppliers enforcing 30 to 45 day credit terms have to be balanced against ‘potential cash’ which may sit in work in progress for 60 days and then take a further 60 days to be collected from clients. A gap in working capital availability usually has to be bridged by further capital investment by partners and means limitations on partners drawings, a double hit to individual partner finances.
Our survey showed that 2-4 partner firms are still struggling to gain control of lock up, the average lock up days have continued to increase to 130 days, which is almost 50% higher than it was five years ago. Pleasingly, all other sized firms have either remained static, in the case of the largest firms, or achieved a decrease in average lock up this year, with the most significant improvement in the smallest firms of 11 days. Overall, this has meant a marginal decrease of 3 days down to 120 days across all the firms surveyed. With one day of lock up per fee earner generating nearly £19,000 in the 11-25 partner firms, continuing to make inroads into lock up could be the easiest way for firms to improve cash availability.
Words of Warning
Although the majority of firms have seen a decrease in the amount of cash tied up in lock up since last year, there are still vast improvements which could be made. All bar the smallest firms have lock up days in excess of 100 days. This equates to lock up per equity partner ranging from £67,000 to £385,000. For the largest firms, simply reducing lock up by one day could generate nearly £46,000. It is imperative that firms do not become complacent and continue to concentrate on reducing lock up significantly. Profit needs to be converted into cash as quickly as possible for firms to flourish and have a competitive advantage in an increasingly uncertain marketplace.
- Fee earners, and in particular partners, need to take responsibility for credit control procedures. This should not be left to the finance team alone.
- Interim bill on matters. Bill immediately on completion rather than following traditional billing cycles.
- Avoid surprise bills. Debts are much harder to collect when they are under dispute.
- Enforce credit terms with customers. In certain cases it may be appropriate to ask for money up front before commencing work.
- Review performance targets and KPI’s for fee earners. Consider the balance between a reward and penalty system.
- Put sufficient monitoring systems in place so that accurate and timely data can be extracted to ensure the lock up position is fully understood and addressed.
- Ensure fee earners are fully trained and
- understand the importance of releasing
- lock up. We can deliver training courses to
- educate lawyers on ‘understanding finance’.
This article featured in our 2019 Legal Benchmarking Report. Download the full report here: 2019 Legal Benchmarking Report
If you would like to discuss any of the issues raised in more detail or if you would like to speak with a member of our team, please contact Hannah Farmboroughor call on 0207 429 4147 to be put in contact with a member of our Professional Practices team.