Lock Up for Legal Practices
Lock up is the sum of unbilled work in progress, unpaid bills, and unbilled disbursements.
Cash will always be king in business and therefore the amount locked up in debtors and work in progress will always be of concern to partners. It is all about cashflow management.
Why is it important?
At the risk of stating the obvious, you can’t turn the work you have done into “cash” unless you bill it and receive the monies. The higher your lock up levels, by definition, the less efficient your process is and the more likely you are to require external funding or have cashflow problems. Poor cashflow is a major factor in the failure of firms.
There is a direct correlation between improvements in lock up and the required working capital committed by partners reducing.
If a firm can generate cash via lock up then it has more choice over investment strategies, than if it has to then consider financing options.
Our review shows that 2-4 partner firms, after 4 years of rising levels, have tightened control of lock up and decreased the level to 110 days, back to 2016 levels. This is mainly due to debt collection being brought under control to around a 6 week level.
The worst performers in the review are the 5-10 partner firms that have seen a 10 day increase to 142 days, which implies some lack of control in the process overall. Those firms with 25 partners or more have seen a reduction by 10 days to 136 days but this still equates to a massive £363,000 per Equity Partner.
Sole practitioner firms still remain by far at the lowest level (63 days), largely as the majority of billing and debt collection is undertaken by the fee earners and they have closer relationships with their clients.
With the exception of 2-4 partner practices, firms have seen a small decrease, or a relatively static level of lock up, which is encouraging as there are still vast improvements to be made, while relatively small change in the economic environment or taking your eye off your procedures could see lock up increasing again.
Many firms target 100 days lock up, which if achieved would release cash of:
- £483,000 in 5-10 partner firms
- £618,000 in 11-25 partner firms
- £2,056,000 in more than 25 partner firms
Call to action
- Ensure all staff understand the commercial reality, that they need to invoice and collect monies promptly.
- Agree the billing protocol, payment terms and preferably the amount, with the client at the outset as the easiest narrative to write on a bill is “Fee as agreed.”
- Make invoices payable on presentation. By giving 30 days credit you are immediately increasing your lock up by that amount.
- Make it easy for clients to pay and consider implementing a Direct Debit system. Ensure you can take credit cards and other forms of electronic payment.
- Make your client relationship manager the person responsible for debt collection, as they are closest to the client.
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.