Looking at Lock Up
Cash remains king in professional service firms, with poor cash flow being the largest contributor to the failure of law firms in recent times. Lock up therefore continues to be a hot topic, as the amount of cash tied up in either work in progress (WIP) or debtors directly impacts the ability of partners to draw profits and can threaten the very existence of firms.
So why worry? Lock up represents work in progress not yet billed and debtors not yet collected, effectively the amount of cash that could be available for use in the firm. This issue is exacerbated in legal firms, as the majority of overheads are fixed and have to be paid, regardless of work completed.
Suppliers enforcing 30 to 45-day credit terms have to be balanced against ‘potential cash’ which may sit in work in progress for 60 days and then take a further 60 days to be collected from clients. Any gap in working capital availability usually has to be bridged by further capital investment by partners and means limitations on partners drawings; a double hit to individual partner finances.
Our national association, MHA, have been providing an insight in the UK’s Legal Sector over the past 7 years, with an annual benchmarking report, which among other financial indicators, looks at lock up in over 100 regional law firms. We found that the average lock up of those firms, ranging from the smallest, 1 partner practices to those with over 20 partners, stood at 120 days in 2018/19; equating to a rate of lock up per equity partner, varying from £67,000 - £385,000. For the largest firms, simply reducing lock up by one day could generate nearly £46,000.
It is imperative that firms continue to concentrate on reducing lock up significantly. Profit needs to be converted into cash as quickly as possible for firms to flourish and have a competitive advantage in an increasingly uncertain marketplace.
- Fee earners, and in particular partners, need to take responsibility for credit control procedures. This should not be left to the finance team alone.
- Interim bill on matters. Bill immediately on completion rather than following traditional billing cycles.
- Avoid surprise bills. Debts are much harder to collect when they are under dispute.
- Enforce credit terms with customers. In certain cases it may be appropriate to ask for money up front before commencing work.
- Review performance targets and KPI’s for fee earners. Consider the balance between a reward and penalty system.
- Put sufficient monitoring systems in place so that accurate and timely data can be extracted to ensure the lock up position is fully understood and addressed.
- Ensure fee earners are fully trained and understand the importance of releasing lock up.
Read further and get in contact
Our 2019 Legal Benchmarking annual report focusses on trends in income, profitability, employment costs and lock up and can be downloaded here.