Future Business Direction
What are the preferred growth strategies of law firms?
Tackling lock-up remains a priority for many law firms, but far from improving, the amounts owed have reached record levels. This leaves firms vulnerable to cash flow problems and bad debts, but there are solutions for firms willing to take the problem in hand.
For a number of years now, when asked how they planned to fund their business strategies, including investment in acquisitions, technology or talent, law firms have overwhelmingly identified improvement in lock-up. Our experience is that many firms are failing to implement the procedural and cultural changes required to generate additional cash and improve their cash flow, in spite of their aspiration that doing so would deliver improvements in future funding.
Our recent analysis suggests that far from improving, the amounts owed to law firms have reached record levels. Although the value of lock-up might be expected to rise in line with increased revenue, this rise may lead to cash flow problems and expose firms to a heightened risk of bad debts.
There are a number of simple changes that can be made in a firm’s processes to improve lock up as follows:
- Billing timetables and amounts should be agreed at the outset of each matter to reduce the risk of clients querying invoices and therefore delaying payment.
- Move away from detailed review of WIP by the client team on an annual or quarterly basis. This should be performed monthly instead.
- Stop raising invoices at the end of the month. Bills should be raised and agreed with the client on the completion of key stages of work.
- The earlier bills are raised, the earlier they should get paid.
- Clients should be kept informed of costs. While lawyers might shy away from perceived ‘difficult’ conversations, in most instances they will find that clients welcome transparency.
- Bills should be raised on account of disbursements paid for by the law firm. Why are firms continuing to fund their clients in this way?
- Credit control is best operated by experts and not individual client teams.
Even where bills are raised, the time taken for them to be paid is increasing. Is this because partners are focused on winning and doing work, rather than billing and collecting cash?
In our experience, it is not as straightforward as updating processes; a cultural shift is important in creating lasting change. We have seen the best results when WIP, ‘on account billing’ and cash collection targets are implemented for teams as opposed to individuals. 43% of survey respondents have begun to include lock-up performance as part of the annual performance assessment, and this proportion has been steadily increasing. Other strategies implemented by firms include linking partner drawings to cash collection and WIP management.
External funding is available to law firms, with banks continuing to be interested in lending, particularly for IT projects, but firms should be generating and retaining cash to fund important projects.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.