The financial landscape for the UK’s leading law firms is becoming increasingly strained, with the collective debt of the top 50 firms climbing to £5.4 billion. This significant rise, amounting to an additional £177 million over the past year, underscores the challenges these firms face as they struggle to manage delayed client payments amidst a tougher economic environment.
Exclusive data provided to City A.M. by the accountancy firm Lubbock Fine reveals that this surge in debt is closely tied to the extended “lock-up” periods that firms are experiencing. The term “lock-up” encompasses both work in progress (WIP) and debtor days. WIP reflects the time lawyers have invested in ongoing cases, while debtor days indicate the average duration it takes for clients to settle their invoices. Each law firm sets its own lock-up targets as part of its internal financial strategy.
According to Lubbock Fine, the average lock-up period for the UK’s top 100 law firms has increased to 124 days, compared to 122 days the previous year. Mark Turner, a partner at Lubbock Fine, attributes this rise to economic instability, which is leading clients to delay payments. As a result, law firms are compelled to borrow more to maintain essential functions, such as partner compensation and investment in growth.
Turner notes that managing lock-up days has become a primary focus for law firm management, particularly during economic downturns. Prolonged lock-up periods not only affect cash flow but also impact relationships with financial institutions, which may become reluctant to extend credit to firms with overdue debts.
Another contributing factor to the increased borrowing is the shift towards flexible working arrangements, prompting many firms to relocate to smaller offices. Turner explains that office moves involve significant expenses, including the costs of outfitting new spaces and paying rent on both new and old premises during transition periods.
Additionally, some firms are leveraging borrowing to fund acquisitions. During economic downturns, smaller firms may seek acquisition opportunities, leading larger firms to increase borrowing to support these strategic moves.
As the legal sector navigates these financial pressures, firms are adjusting their strategies to cope with extended payment delays and the costs associated with operational changes. The rise in borrowing highlights the broader impact of economic fluctuations on the legal industry and underscores the need for effective financial management during challenging times.
As UK law firms grapple with these financial hurdles, the broader implications for their operations and growth prospects are becoming increasingly evident. The shift in borrowing patterns reflects the sector’s adaptation to a changing economic landscape, where managing cash flow and strategic investments are crucial for sustaining business performance.