In last year’s report we put to readers that firms were perhaps over reliant on their clients when it came to getting bills paid on time, while maintaining relatively low levels of cash in the bank. The report warned that this strategy was precarious, arguing that if ”there was a significant economic shock and clients were unable to pay their bills, this could have a significant impact on law firm’s long-term cash flow.”
This sounds almost prophetic now. While the report fell short of predicting that it would be a global pandemic and government-ordered lockdown which would precipitate the biggest economic shock since the Great Depression (Brexit and US foreign policy were considered the most likely sources back then), such a shock in whatever form was always a possibility, and the precarious strategy in place at many firms therefore always a financial risk.
Despite a majority of law firms reporting last year that they expect to either slightly or significantly improve their lock-up in the subsequent 12 months, data suggests that this simply isn’t the case. Figures published within The Lawyer in January this year demonstrated that lock-up within the UK’s top 200 law firms is at a five-year high.
Back in January our concerns were supported by another UK accountant specialising in the legal sector who said: “lock-up at some firms is absolutely atrocious. It’s not as if the firms don’t know about it, they are just very blasé about it. All you need is one catastrophic event and you could have a nightmare scenario.”
Well, we now have that catastrophic event, and the signs of that nightmare scenario are visible to an extent within this year’s survey results. While a majority of respondents (66%) believe that their firm’s current level of lock-up will either slightly or significantly improve over the next 12 months, this is down from a combined 79% a year prior and marks the end of a steady year-on-year climb in belief around lock-up improvement. However, this improvement (if it ever happens) will come too late with many firms having to take out additional debt facilities, defer distributions and take advantage of government tax deferral arrangements as they did not have sufficient cash resources to survive the pandemic’s impact.
18% of respondents feel their firm’s level of lock-up will either slightly or significantly deteriorate over the next year. It is notable that 67% of respondents believe their biggest challenge over the next few years will be weathering the economic downturn, with 40% of respondents participating in the government’s coronavirus relief measures to ‘ensure the survival of the firm’. The picture that emerges is not one of financial security.
Contrast this with the 80% of respondents who are reasonably or very confident about the business outlook for the upcoming year and It could be argued that this is an industry in denial. An alternative explanation is that the truly frightening predictions of the pandemic’s impact in March and April have not become reality – if law firms were worried about a complete disaster, but two months later the firm is still alive, that might feel like a success. In addition, a number of partners and managing partners at law firms today successfully navigated the 2008 financial crisis.
One interviewee said: “I was a young board member in 2008 and had a lot of sleepless nights then as the world fell off a cliff. Clear lessons were learnt and I swore I’d never forget the importance of financial discipline.”
However, raw statistics suggest this financial discipline isn’t widespread. Even if firms recognise the value of having cash in the bank, it doesn’t mean they are particularly good at accumulating it. While most legal firms say cash receipts have held up well, will clients will see legal invoice payment as a priority over the medium term? Many may put people, property and IT at the top of their agenda going forward. Law firms will of course eventually have their bills paid - unless their clients succomb to the wave of insolvencies once government support schemes tail off – but what damage will have been done to their business in the interim?
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.