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Law Firm Profitability and the Banking Relationship

16.08.2010

One point underlined by the most recent Quarterly Inflation Report from the Monetary Policy Committee is that bank lending is one of the factors acting as “headwinds to the recovery” – i.e. credit will remain hard to come by as the economy struggles on. Successful partnerships should continue to be good lending propositions, but access to debt funding remains an issue of fundamental importance for law firm management.

Profitable Law Firms: Profiting from the Banking Relationship

The situation has clearly improved somewhat in the past year, but banks will undoubtedly continue to take a sober attitude towards lending. Access to debt funding is an issue of fundamental importance for law firm managers. With friends in both the banking and legal sectors, whether or not they have got the balance right is a question on which we aim to stay neutral for now!

Whatever the rights and wrongs of the situation, the unavoidable fact is that the nature of the relationship between law firms and their bankers continues to shift – and law firm management must recognise this and act accordingly.

History and Law Firm Profitability

Law firm management teams historically had the upper hand in their relationships with banking partners, based on high inherent law firm profitability, valuable introductions to new clients and lucrative client account balances.

Now that law firm profitability has taken a serious blow across the sector, and introductions and client account balances are in shorter supply, law firm management teams need to take a far more proactive role in their banking relationships.

This means regular communication, preferably led by a financially literate member of the firm’s management, to keep the bank up to date – and backed up by comprehensive, comprehensible management information. The last thing the bank wants is any surprises.

Comprehensible Law Firm Management Information

A consistent complaint from bankers dealing with the legal sector is the poor quality of management information. The number of firms that request increased facilities, without even providing a cash flow forecast or balance sheet, is remarkable.

The bank will require access to regular and reliable cash flow forecasts (the trustworthiness of which will be borne out over time), profit and loss account and a healthy balance sheet.

An Ally – Not an Enemy

Bankers are all too often vilified, and at times it is easy to understand why. However, all banks are quick to point out that they are keen to lend to profitable, successful partnerships. Partners in profitable law firms ought to regard the bank as an ally, not as an enemy.

Our experience has been that, while unwilling to increase their exposure to risky propositions, the major lenders are still happy to back profitable law firms with strong management and healthy prospects of success.

As we suggested in last week’s post, Double Dips and Law Firm Strategy, securing funding is absolutely vital for firms looking to grow and enhance their competitive position. Ultimately, a profitable banking relationship will mean a profitable law firm.
 

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