Tackling lock-up syndrome
If you are in a high street firm battling with your bank to keep your payment facility so you can fund work in progress, her';s a new set of stats you could drop in the conversation next time. According to research by accountancy network MHA, profit per partner at two- to four-partner firms has grown by an astonishing 27 per cent last year to an average of £145,351. And the average net profit percentage rose from 24 to 28, an increase which appears to be result of their unique scale. These firms are more nimble, according to MHA's head of legal services Harmy Gill, and more able to “turn increased fee income streams into increased bottom line profitability”. At 60 per cent of fee income, their employment costs were also the lowest ones.
But it’s not all rosy on the high street if you look beyond those comforting figures. Sole practitioners saw a 12 per cent drop in average profits, a figure which is alarmingly in tune with some of the stories we hear at Solicitors Journal. Much as we would like to think that increased activity in the property market has helped rejuvenate fee income, the reality is that a lot of practitioners had to bring fees down. Only now are they becoming more confident that there is enough demand that they can move them back up.
It is also difficult to think that the rise in PEP is due to niche firms being more resilient and picking up work such as start-ups. No doubt they are, but few on the high street would describe themselves as niche.
Worse, their average lock-up days stood at 127, well over the report’s recommended figure of 110. Which takes us back to funding work in progress. Unless firms can convert WIP into cash promptly, they will continue to struggle with access to finance. A separate report, this time by Crowe Clark Whitehill concluded as much. Although the segmentation is slightly different, it also highlighted the problem with endemic delays in collecting fees.
In addition to making it more difficult to convince your bank that you are managing your cashflow efficiently, this could have other consequences. There will be more mergers on the high street, and you are unlikely to be a desirable partner if your number of lock-up days suggests your firm is not as dynamic as you are trying to portray it. Worse still, if, as predicted, financially astute clients are going to put greater pressure on fees, your whole model could just collapse. You don’t want that.