Law firms’ bank debts have jumped 36% in the past year, from an average of £28,000 to £38,000 per equity partner*, as the profession targets growth, says Hazlewoods , Chartered Accountans and Business Advisers who specialise in the legal profession.
Hazlewoods says that as workloads increase across the profession, many firms are increasing headcount and raising staff salaries, and returning to investment in assets such as IT systems and software that may have been put off for several years.
Hazlewoods adds that many law firms may have been forced to increase their borrowing due to having more cash tied up in unpaid billing and work in progress.
The firm explains that for this reason, working capital is often tighter during times of expansion than during a recession.
Non-bank debts have also risen from £10,000 to £17,000 per equity partner in the past year (see graph below).
Jon Cartwright, Legal Team Partner at Hazlewoods, comments: “Bank debt is being driven up in part by the legal profession being a victim of its own success – workloads and billing are both on the rise, and firms are ploughing that back into their practices.”
“As confidence rises, so more firms are feeling positive enough to take on more debt from their banks and make investments in staff and systems that might have been shelved years ago.”
“Pay for fee-earners and support staff are both rising, along with headcounts, and a lot of firms are now dusting down investment plans that were put to one side during the recession – renewal of matter management software, increased marketing activity, and refurbishment of premises are all on the agenda again.”
“While rising workloads and increased investment will be welcome across the profession, the ongoing issues many firms have with lockup – the wait to convert completed work into cash – mean that borrowings have had to rise to compensate.”
“Delays for payment rose steadily following the credit crunch, and for a lot of firms, lockup of four or five months has become thenorm.”
Hazlewoods says that the average lockup among law firms is now 140 days, according to their survey.