The burden of expenses

In the last two years, a record number of over 500 firms have closed and the projections for the remainder of 2014 look grim. While small and medium sized firms are undoubtedly being pressurised by the insurance industry, financial constraints are still the major factor causing this on-going catastrophe.

Since 2008, the attitude of the banks has radically changed. Monthly accounts are often now requested and, if after the months, the book debts have not been collected or the work in progress has not been billed, the banks may refuse to allow drawings and or salaries to be paid if the overdraft is at its limit.

Unfortunately, many senior partners continue to regard their law firm as a personal fiefdom rather than as a business that practises law. While attention to the gross fee turnover is important for establishing the firm's future growth potential, it is the expenses which often decide its fate.

Historically, law firms have papered over the cracks of increasing expenses through increased turnover, but this position has become untenable. Lawyers mistake this that they quantify e their expenses against the number of lawyers rather than the volume of work carried out by each lawyer. For example, a conveyancing lawyer will often require twice the secretarial support and more expensive software systems, in comparison to a commercial litigation lawyer. Firms still underestimate the financial impact of the COLP and COFA regulations which can take up to 60 per cent of a designated partner's fee earning capacity.

Technology poses further challenges. When software is updated, often the in-house computer servers are not fast enough and need to be replaced at a considerable expense. To be compliant with the Solicitors Regulation Authority, the data needs to be backed up externally which is a continuous expense. When assessing the financial viability of a legal department all expenses required to operate that department should be considered.

Indeed, low maintenance lawyers will raise these issues when debating their salary reviews. These are just a few of the examples of the everyday problems faced by law firms which inevitably cause internal political pressures and permeates to all the non-equity lawyers and even support staff.

Many partners have in the past considered that the financial strength of the firm is their burden and responsibility. In reality it is a shared one, the importance of which most other companies in different industries would automatically recognise.

The strongest companies thrive on building confidence in their employees. Better management of the firm's bottom line will indicate to all members of the firm an intent to be efficient, a readiness to take on the future and send a clear message of strength to the firm's lenders.