Rise in drawings exceeding profits at mid-tier firms

A recent survey has revealed that 16% of respondents from mid-tier firms reported that partners’ drawings exceeded profits for two consecutive years.

The data was collected as part of the Law Society’s Law Management Section’s Financial Benchmarking Survey 2019.

The survey found that the number of firms reporting that partners drawings are exceeding profits has risen over the past two years in comparison to when the survey began in 2015. 

In 2015, the survey found that partners’ total drawings exceeded profits for a quarter of participants, with a similar proportion in 2016. 

However, in 2017, this increased to 30% and to 26% in 2018, with partners in 36% of practices taking drawings in excess of profits. 

The survey report highlights that this is sometimes due to the timing difference between when practices withdraw profits.

However, in 2017 15% of practices had taken drawings in excess of profits for two consecutive years and in 2018 it was 16%.

This is of concern as in 2015 the Solicitors Regulation Authority began risk-assessing practices based on selected figures from their annual accounts, with drawing in excess of profits being one metric used to assess risk.

Others include borrowing in excess of net assets and borrow beyond a certain level. Borrowing was also shown to have gone up the last two years.

Paul McCluskey, UK head of professional practices, SME Banking at Lloyds Bank Commercial Banking, which sponsored the survey, urged managing partners to clampdown on excessive drawings.

“I am still concerned by the number of firms across the sector that continue to allow partners’ drawings to exceed profits,” he said.

He added that: “Succession is a major issue and this practice not only weakens the financial strength of the firm - thus potentially discouraging a prospective investor - but it also means practices are less likely to be able to sustain a healthy future. I encourage all managing partners to take a hard stance against this culture.” 

The survey found that in general mid-tier firms were weathering uncertain times quite well with a median rise in income of 4.2% for participating firms.

Law Society of England and Wales president Christina Blacklaws commented: “The financial performance of respondents has remained strong and even improved in key areas, with a median rise in income of 4.2%.

“Median fee income per equity partner has increased by 6% over the past year, and the ratio of fee earners to partners remained steady.”