Posted by Robert Banner, a council member of the Institute of Legal Finance and Management (ILFM), a Legal Futures Associate
Banner: Focus on cash flow management
In this, the second of my three-part series on the ILFM’s collaboration with Crowe and its annual UK Law Management Financial Benchmarking Report (see the first here), I take a closer look at some of the everyday financial activities of a law firm that can have a great impact on overall financial health.
For legal finance teams, lock-up, cash flow and billing processes are their bread and butter.
But rather than seeing these activities as routine daily necessities, if firms actually consider them as key indicators of financial performance – and therefore risk – they can identify problems early, put improvement procedures in place and therefore mitigate those risks.
During my lengthy involvement in law firm management, I have found that the fault for lock-up, cash flow and billing problems normally lies at the feet of fee-earners and management as opposed to legal finance teams.
For example, understaffing often leads to the delay in work being completed, many fee-earners have difficulty in requesting sufficient monies on account and to compound matters, when a case is completed, there is delay in billing and also liaising with the legal finance department to sort out account balances.
Managing lock-up
There is some good news in the report in that the average amount of lock-up has improved from 145 to 138 days across the sector. Although still high by broader commercial standards, within the legal profession it is a positive development.
Reduced lock-up improves liquidity and working capital, improving a firm’s ability to withstand market changes. However, even with marginal improvements, lock-up can still leave firms exposed to risks during periods of instability.
City v Regional firms
The report shows City firms have been more successful in reducing lock-up than regional firms. This difference may reflect firms’ differing approaches and stages of operational maturity, resourcing and culture.
Larger firms typically benefit from more established billing frameworks, greater automation and stronger credit control processes.
Cultural attitudes also play a part. In firms where billing and debtor control are openly discussed beyond the finance team, fee-earners tend to have a clearer understanding of the impact their behaviour has on cash flow. Issues are identified earlier, escalation is less contentious and finance teams feel better able to challenge delays.
This openness generally results in faster billing and collection, reduced ageing of work in progress (WIP) and debtors, more predictable cash flow and improved conversion of revenue into profit, with less reliance on year-end corrective action.
In contrast, where financial discussions are more sensitive or avoided, delays often go unchallenged. Finance teams are forced into a reactive role, WIP and debtors accumulate without clear accountability, and cash flow becomes volatile, sometimes despite strong headline performance.
Regional firms are often more exposed to delayed billing and elongated WIP due to a combination of structural, commercial and cultural factors.
Client profiles typically include a higher proportion of private individuals and SMEs, where pricing sensitivity, billing negotiation and staged or deferred payment arrangements are more common. Matters are often longer running and less predictable, with fewer natural billing milestones and greater reliance on time-based billing, increasing the risk of scope creep without timely fee generation.
These pressures are typically exacerbated by smaller finance teams, lower levels of billing automation and greater dependence on partner-led billing decisions. A strong focus on client relationships can also make billing conversations feel more difficult, delaying intervention.
In practice, this leaves WIP on the balance sheet for longer, extends cash conversion cycles and increases exposure to cost inflation, interest rate volatility and tax reforms.
WIP remains a pressure point
Despite improvements in overall lock-up, WIP days have remained broadly the same, with significant disparity between City and regional firms. Ageing WIP presents a substantial financial risk, delaying profit recognition and weakening cashflow visibility.
Persistent WIP issues often reflect process weaknesses rather than workload volume. Inconsistent billing triggers, unclear partner accountability and limited financial insight at matter level can all contribute to WIP accumulation, even in busy practices.
Billing processes remain largely manual
Interestingly, the report confirms that billing remains heavily reliant on partners and fee-earners to initiate and manage the process. Manual billing workflows introduce inconsistency and delay, particularly where fee-earners prioritise client work over administrative tasks.
This creates opportunity cost in terms of chargeable time and increases the risk of delayed or incomplete billing. It also highlights the ongoing tension between fee generation and financial discipline, something that ILFM members tell us finance teams are increasingly expected to manage.
Cash flow pressure intensified by basis period reform
Basis period reform has added another complication. Accelerated tax liabilities for partners from January 2025 mean that cash collection is now central to financial stability.
Improved forecasting and real-time cash visibility are essential, particularly as firms look to manage pressure on partner drawings and capital. Finance teams play a key role in modelling these impacts and supporting partners through changes in tax timing.
Cash flow as a governance issue
Taken together, these trends reinforce the need to view cash flow management as a strategic, governance issue rather than a tactical exercise. Weak lock-up controls can undermine otherwise profitable firms, while consistent financial discipline supports long-term sustainability.
There is growing interest in billing automation and AI-enabled workflows, which can support timely billing through automated triggers and approvals.
However, automation is not a quick fix. Poor implementation without governance introduces new risks. Technology should reinforce and strengthen financial policy, not replace it.
What this means for legal finance professionals
Proactive intervention in these areas can materially improve outcomes but as I mentioned at the outset this involves input not only from legal finance teams but from the firm as a whole.
The way a firm manages lock-up demonstrates how financially robust it really is. Firms with disciplined approaches to cash flow tend to be more resilient when conditions become challenging – and that resilience is driven largely by their finance teams.
The ILFM supports those whose roles in finance continue to evolve from process management to strategic risk management, encompassing robust billing frameworks, consistent financial controls, partner education and forward-looking financial insight.
Proactive intervention in these areas can materially improve outcomes, not just for finance teams, but for the firm as a whole.
Until his recent retirement, Robert Banner was involved in the management of BannerJones Solicitors for over 35 years and was chair of the Law Society’s law management section. He is currently a board member of The Solicitors Charity.
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