Partners “in the dark” over their firm’s financial performance and risk of failure
Williams: cash flow problems more prevalent than many realise
Too many partners are unaware of their firm’s financial situation and the personal implications of the business going under, it has been claimed.
According to leading accountants and business advisers Baker Tilly, firms are in serious danger of going out of business because they do not have sufficient cash to meet their running costs.
The warning follows the high-profile collapses of a number of law firms, as well as recent research by the Association of Business Recovery Professionals (R3) which showed that just over 30% of UK law firms are at risk of failing within the next year.
Baker Tilly is currently surveying firms to assess their awareness and knowledge levels of financial stability.
Rowan Williams, head of its London and south professional practices group, said: “Many partners assume that, as their practice has come through the recession and profits are stable or improving, they are safe. But if a practice doesn’t have sufficient cash to meet its running costs, then there is a real risk of firms failing. I fear that the issue is more widespread within the legal sector than people would imagine.
“I firmly believe that too many partners are unaware of whether there are any serious financial issues within their practice, and don’t understand the personal consequences if their business goes under. In my experience, law firms ask for help too late, after things have seriously taken a turn for the worse, which is usually about six months before failure.
“It’s going to get tougher for law firms, and if they don’t identify the red flags early, then the legal sector will indeed face the predicted ‘perfect storm’, with many becoming insolvent this autumn.’
Research published yesterday by MHA – a UK-wide association of nine accountancy and business advisory firms – warned that law firms continue to ignore lock-up and the impact it has on their cash flow.
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