One of the key issues mid-sized firms must grapple with if they are to achieve their financial potential is the level of lockup in their working capital cycles. This is something that businesses in other sectors keep a very close eye on in order to minimise their borrowing requirements and to boost their cash reserves, and evidence from elsewhere in the legal sector suggests that law firms can keep an equally tight rein on their lockup – but it requires very active management.
A recent survey of the UK’s top firms by PWC showed lockup levels averaging around 110 days. This is a strong benchmark. Surveys conducted separately earlier in the year by the Law Society’s Law Management Section, the Lawnet network of firms and Natwest all indicate that in smaller firms of up to 5 partners, similarly low levels of lockup can be achieved.
However, in the middle range of firms – typically with 5-25 partners – the median lockup level is consistently in excess of 150 days. This is a significant difference and has a major impact on the funding requirement for those firms.
This begs an obvious question – what is preventing mid-sized firms from achieving the lockup levels that are commonplace amongst their peers at the small and large ends of the market? There is probably a range of contributing factors, from a culture where some partners are not used to the relentless focus needed to turn WIP into bills and bills into cash, through inefficient and ineffective systems and processes, to a client base that has simply not been put upon in the past to pay in such a timely manner.
It is clear, however, that reducing lockup will have a major impact on the firm’s financial performance. As a simple example, if a firm can take 35 days out of its lockup, for every £1m of turnover it can reduce its borrowings by £100,000. This means that a 10 partner firm with turnover of £5m could reduce its borrowings by £500,000 by reducing its lockup by 35 days. That equates to a lot less worry and far greater peace of mind for partners (and for lenders).
Focusing on the Financials
Law firms can clearly succeed in reducing their lockup when they are focused on the issue. At year end, the evidence shows that many firms reduce their lockup by over 10 days in a short period of time, but this discipline seems to be lacking throughout the rest of the financial year. Taking that year end focus and applying it to the lockup problem throughout the year would likely result in some very significant gains.
At Wilkinson Read we have considerable experience of helping firms to reduce their lockup levels using our Pipeline process and programmes that specifically target the working capital cycle, cash flow management and lockup reduction.
For a conversation about these issues, please get in touch with Barry Wilkinson (firstname.lastname@example.org).