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UK law firms are cutting costs to maintain cashflow as lock-up increases

Firms are depending upon capital calls on partners, overdrafts and mergers to stay afloat, survey finds

22 August 2012

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By Manju Manglani, Editor (@ManjuManglani)

Law firms are experiencing greater pressure on cashflow, according to a recent survey by the Law Society of England and Wales.

The survey found that 40 per cent of responding firms faced more cashflow pressures in the past quarter than they did in the previous quarter.

On average, debtor days increased by 26 per cent quarter-on-quarter to 60 days and work-in-progress days increased by 11 per cent to nearly 140 days. Total lock-up increased by 16 per cent to 193 days.

Fee income was down for many firms, at a median of 94 per cent of fee income in the previous quarter.

Firms have reacted in varying ways to these increased pressures on their finances.

In 12 per cent of responding firms, partners have deposited new capital to finance cashflow requirements. A similar amount of firms have restricted partner drawings.

Overdrafts have been increasingly leveraged to manage cashflow. A third of responding practices said that they were operating within 25 per cent of their overdraft limit, while a sixth said they regularly operate within ten per cent of their overdraft limit.

In the past quarter, fourteen per cent of respondents have also made redundancies, which were evenly split between fee earners and non fee earners.

A third of responding firms said they are now considering a merger with another practice and almost of all of these said they are actively speaking to other practices.

Fifty-one practices from across the country participated in the Law Management Section’s first quarterly financial benchmarking survey, which covered the period of April to June 2012.

Said Law Society president Lucy Scott-Moncrieff: “In a climate where access to funds from the banks or elsewhere is limited, legal practices are going to have to look at other ways to make savings and release cash.

“Effective business management is essential, especially at a time like this.”

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