Big firms “burning through” the little cash they have

Balance sheets: ‘Refined’ but not ready for coronavirus

Many of the country’s largest law firms are unprepared for the rate at which they are burning through cash during the Covid-19 pandemic, a review of their accounts has revealed.

It showed that more than half of them (55%) had insufficient cash on their balance sheets to cover just one month’s operating expenses, while 38% did not have enough to pay a month’s salaries.

The firms also had an average of 33p in unpaid invoices for every £1 in annual revenue.

Litigation funder Augusta yesterday published a review of the accounts of the 40 largest law firm LLPs, finding them “arguably undercapitalised”.

It said the way they had “refined” their balance sheets over time to enhance partner distributions and manage cash balances as efficiently as possible had not prepared them for a crisis where deal-flow and client’s legal budgets fell, while receivables and unpaid invoices grew.

Augusta investment manager Andrew O’Connor said: “Modern law firms are uniquely complex machines that rely upon regular cash receipts to meet significant operational expenses.

“The cash-burn rate experienced during this period means that cash reserves will be strained and many firms will be required to consider immediate solutions, including reducing partner distributions, drawing on credit facilities and requiring additional partner capital contributions.”

This has already been happening, he noted – hardly surprising given the absence of cash reserves at firms to pay salaries for even a month.

Mr O’Connor observed that getting clients to pay invoices in a timely manner was a major undertaking for the firms even during normal economic conditions, as nearly every reviewed firm was already owed an amount equal to 25% or more of their total annual revenue.

“Partners will be under acute pressure to monetise invoiced work, however, it may now be harder than ever for firms to extract timely cash payment from clients” he said.

He added that trade debtors constituted more than half of the firms’ current asset balances, which showed they were not as liquid as they may have thought.

A ‘silver lining’ was that most of the firms have limited existing bank loan obligations – only a fifth have bank loans and overdraft balances greater than 10% of their annual revenue, “which by the standards of most industries, is a relatively low rate of leverage”.

This meant firms may have the capacity to take on additional loans to meet obligations during this period.

But Mr O’Connor predicted that many may be cautious to rely on traditional debt finance as a medium-term solution.

If the funds raised were rapidly burnt covering only short-term cash obligations on a subsistence basis, this would leave them vulnerable if the crisis were to persist and market conditions did not improve.

“Further, finance may only be available to firms, particularly smaller firms, if that finance is secured by the partnership, which is an obligation that individual partners may be reluctant to embrace during times of uncertainty.”

This might lead them to consider alternative finance solutions, he concluded.

Leave a Comment

By clicking Submit you consent to Legal Futures storing your personal data and confirm you have read our Privacy Policy and section 5 of our Terms & Conditions which deals with user-generated content. All comments will be moderated before posting.

Required fields are marked *
Email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.


Keeping the conversation going beyond Pride Month

As I reflect on all the celebrations of Pride Month 2024, I ask myself why there remains hesitancy amongst LGBTQ+ staff members about when it comes to being open about their identity in the workplace.

Third-party managed accounts: Your key questions answered

The Solicitors Regulation Authority has given strong indications that it is headed towards greater restrictions on law firms when it comes to handling client money.

Understanding vicarious trauma in the legal workplace

Vicarious trauma can happen to anyone who works with clients who have experienced trauma such as domestic or other violence, child abuse, sexual assault, torture or being a refugee.

Loading animation