Last year saw solid real-terms growth for mid-sized law firms, with median growth of 4.2% the result of increased fee income rather than simply more fee-earners, new figures have shown.
It is the ninth year running that the Law Society’s law management section financial benchmarking survey has reported a median fee increase, at an average of 5.9% over that period, compared against RPI inflation currently at 2.7%.
The latest survey – which involved 210 firms providing two years of accounts for accountants Hazlewoods to analyse – found that 71% reported year-on-year fee growth in 2018, with a quarter seeing growth of over 10%.
The large majority of participants had a turnover between £5m and £35m – while there were some smaller practices, the section did not poll the biggest firms. Over a quarter of the firms ranked 101 to 200 based on revenue took part.
Between them, the 210 firms had 16,000 partners and employees, and fee income of £1.1bn – an average of £5.3m per practice – and combined net profits of £243m.
The firms recorded a median fee income per equity partner of £690,778, an increase of 6.4% on 2017, although smaller firms generally saw much lower results.
Positively, the growth came from increased fee income per equity partner for most practices, rather than simply more partners.
The median profit per equity partner, which has grown every year since 2010, went up 1.4% to £151,613, with the net profit margin reaching to 23.2%, mainly as a result of increased fee income.
However, partners in 15% of practices took drawings in excess of profits for two consecutive years.
Private client (7.7%), commercial conveyancing (6.2%) and company/commercial work (5.8%) recorded the highest increases when broken down into practice areas.
Residential conveyancing practices recorded the highest fee income per equity partner at £923,000. Private client (£715,000) and claimant personal injury (£701,000) were next, with employment the lowest at £316,000.
The top three also had the highest number of fee-earners per equity partner at around six.
The survey found a 3.3% increase in the number of fee-earners, and average fees per fee-earner up 1.3% to £124,253.
It said: “The growth in the number of fee-earners is good news, as it demonstrates that partners in most practices are optimistic about the future.
“The increase in average fees per fee-earner is also good news, as it shows that new fee-earners recruited during the year are being productive and generating chargeable work in line with their peers. Existing fee-earners are recovering more of their chargeable time, or have been able to increase their chargeable rates.”
The number of secretaries per fee earner fell very slightly, to 0.5 to 1, compared to 0.77 a decade ago.
The survey said the old rule of thumb that staff costs, non-salary overheads and profit each accounted for a third of income was no longer appropriate for the majority of practices, mainly as a result of increasing staff costs, which now account for nearly half of income.
The survey said lock-up fell 4%, and there were also reductions in both WIP and debtor days. “A 4% reduction in lock-up will make a significant difference to cash flow. For a practice with turnover of £5m, this would free up £82,000 of cash.”
Two-thirds of firms reported a positive office account balance at their most recent accounting date, with a median balance of £85,000.
Fewer than one in five firms had no overdraft or borrowings at all. For those firms with bank borrowings and/or an overdraft, the median amount owed per equity partner was £57,455.
Around half of the firms also had non-bank borrowings such as hire purchase or finance agreements, at a median level of £22,666.
“Banks continue to view the legal sector positively, although there is an increasing reluctance to lend to practices specialising in areas such as personal injury work,” the report said.
“As per last year, we have seen considerable levels of new lending, secured by a debenture over the practice only, where practice performance and debt to equity ratios support it.”
Looking at issues facing solicitors in the year to come, the report said increases in bank base rates over the past 18 months meant practices were gradually beginning to earn decent amounts of interest on client monies “for the first time in years”.
It continued: “Increasing numbers of practices now hold the top slice of client money in one or more SRA-compliant term deposit accounts in a bid to earn more interest.
“If you have not already done so, we would recommend that you review your banking arrangements, and have a look at your interest policy too, as lots of practices have moved away from the old £20 de minimis limit. A £50 de minimis limit is fairly common nowadays.”
There was also the new SRA accounts rules, due to be introduced in November. “The ability for some practices to hold monies received in advance for fees and disbursements in their office account in future could prove very beneficial to cash-flow,” the report said.
Incorporation was also a growing trend, for how it both managed tax exposure and created additional working capital more tax efficiently.
“Lots of practices are also considering employee ownership, which usually requires limited company status. With corporation tax rates set to reduce to 17% from April 2020, the trend is likely to continue.”
The full survey can be downloaded here.