Banks’ lending to law firms is coming under greater scrutiny, a leading accountancy expert has warned.
Johnathan Dudley, Midlands managing partner at accountants Crowe Clark Whitehill, said perceptions had changed.
Commenting on a Crowe Clark Whitehill survey of the legal market, Mr Dudley noted: “In an environment where well known, substantial law firms are known to be in financial difficulty, it will be increasingly difficult for law firms to fund their practices from external sources.
“Never has it been more important to manage work in progress, debtors and cash in law firms.”
He warned law firms: “It is vital to fully understand and monitor performance and delivery covenants in your existing facilities, match borrowing terms to underlying expenditure and, above all, maintain a healthy two-way dialogue with your bank.
“For those firms that are sailing a little too close to their facility limits, it is time to ask some ‘what if’ questions and take action sooner rather than later.”
The report, Crowe Clarke Whitehill’s annual Solicitors Benchmarking Survey, highlights how the SRA has been adapting its approach, with the threat of financial difficulties in law firms joining other concerns such as fraud or misuse of client money.
Compliance too has taken centre stage following the introduction in recent years of revised regulations and the introduction of the Compliance Officers for Legal Practice (COLP) and Compliance Officers for Finance and Administration (COFA) roles, something which Crowe Clark Whitehill’s Midlands office has embraced with the introduction of a special COFA network and series of meetings where officers can exchange ideas.
Network organiser Ross Prince, an audit manager of professional practices, said: “It is clear that the legal services sector is changing rapidly, with more important strategic decisions being made than ever.
“Our COFA network has reported that the amount of resource that is involved in compliance cannot be underestimated. The key is turning what seems to be a regulatory burden into something positive – this is the opportunity to really look at your business with fresh eyes and see how you will fit into this ‘new world’.”
For the second year running, the survey showed that around 40 per cent of respondents reported in excess of 150 lock up days. Too many also find it hard to collect billed fees, with 69.8 per cent admitting it takes them over 60 days to do so. And this is despite many facing economic pressure with the pick-up of the legal market lagging behind that of the broader UK economic recovery.
“Working capital management is an area of continuing concern,” the report states. “The ability to bill work and collect debts is critical to ensuring positive cash flow and there does not appear to have been any significant improvement in working capital management during the year.”
The survey, which covered both London and regional firms, said most participants were only reporting small to modest growth. Those firms that did manage to prosper did so primarily through acquisition rather than organic growth.
It stated: “It has been a very mixed year for the legal market. Many law firms have had to work harder to stand still.
“What constitutes ‘success’ should be considered in the context of the difficulties of the past year, which has seen continuing economic, financial, regulatory and market challenges for the legal profession, which will continue during 2013/14.
“Well run legal practices will continue to prosper. These firms will have excellent client-focused service delivery, the ability to retain and recruit talented partners and staff, sound financial and cash flow management and reporting, well defined management structures and governance processes and, above all, a business model that is wholly consistent with the services offered. Firms need to be visionary in identifying new ways to generate business and have an appetite for change.”
Survey contributors represented the broad spectrum of the UK legal market, from those with a turnover in excess of £100 million to small High Street businesses.
Average staff costs as a percentage of revenue are 40 per cent.