We may not yet be out of the recessionary woods, but many firms are now (rightly) looking to the future, and considering their options for growth and development. In the past, this was something of a no-brainer – firms grew year on year, in some cases growing simply for the sake of growth itself.
There is a distinct danger that this mindset will reappear along with the ‘green shoots’ the optimists are predicting will appear towards the end of 2009 and beginning of 2010. This may not seem like the biggest cause for concern as the economy picks back up, but in fact many more businesses will fail in the first stages of the upturn, as they struggle to fund growth, than did during the downturn itself.
Managers in law firms across the country need to consider very carefully their options for growth, and how they will fund it.
An increase in fee income will naturally bring with it an increase in profits (as most of the costs in law firms are fixed). However, the increase in lock-up (i.e. the firm’s assets) will also need to be funded. When taxes are taken into account, it is entirely plausible that the extra funding requirement will significantly outweigh the increase in profits.
There are effectively three options open to managers looking to fund growth:
- Increase partner funding levels, to meet the extra requirement.
- Increase borrowings, to meet the extra requirement
- Reduce lock-up in line with growth, to negate any extra requirement
Option number 1 is likely to be (extremely) unpopular with the partners, many of whom will have had to accept lower drawings in the recent past.
Option number 2 is likely to be unpopular with the bank, unless the partners are at least willing to match borrowing with their own capital – and, in any case, credit lines are notoriously tight in the current market.
Option number 3, better financial management, may be difficult to achieve. However, it is surely the most palatable (and desirable) option and, to be honest, is something all firms should be striving to achieve regardless their growth ambitions.
The upturn will be fraught with danger, but for those firms with an eye on both top and bottom lines there will be significant opportunities to create competitive advantage and prosper.