Law Firm Meltdown

Posted on September 19th, 2013 by Chrissie Lightfoot

Guest blog post by Vannin Capital

1 in 3 Law Firms Face Financial Meltdown

A climate of financial instability is still the backdrop from which UK legal firms are operating, with the disturbing prediction that 1 in 3 could face bankruptcy this autumn. Based on research carried out by The Association of Business Recovery Professionals (R3), these are frightening statistics. You might think they apply only to small UK firms, squeezed by new government regulations in areas such as legal aid and personal injury practice, but it is a wider problem. Even firms with global offices face financial challenges. These could even be at greater risk. In a difficult global economic climate individual firms might be tempted to believe that there is little they can do to minimise the risks. That as it may be, but awareness of those risks and prudent steps that might be taken to militate against them are advisable.

Assessing the Risks

Although your firm may seem busy with cases, do not be lured into a false sense of security. A potential minefield might indeed be those partner profits, which superficially look healthy. If partners are too keen to draw down their profit share, then this might quickly lead to cash flow problems. Consider the average fixed overheads: on a monthly basis the biggest of these will be staff salaries. Problems arise when these are added to by daunting annual tax assessments and rent demands. The best planned budgets can fail to meet these, especially if clients are tardy in paying their bills. Remember you the firm will already have paid your lawyers their monthly salaries for the work done. More and more clients are questioning bills based on hours totalled. Where cases are done on a contingency fee basis, then that might exacerbate the problem . It could be years before the fee is paid. It is this mismatch between outgoings and income that is at the root of law firms facing insolvency.

Expansion can also put unnecessary strain on the legal budget. It could be expansion of premises. Equally, setting up offices overseas can be a huge financial drain, especially in the early years, as they struggle to become established. The simple economic equation is that the cash must be in the bank if the commitments are to be honoured. If it isn’t, then hoping it will be there in ten years’ time will not wash!

Averting and Avoiding the Risks

In the old days bank overdrafts and loans were always there to tide a firm over the difficult times. Gone are those days. Link this back to the problem of partners being too keen to draw down their profit share and you have the double whammy of the banks being less likely to lend. Partners need to heed this chicken and egg scenario carefully. Short term gain may need to be put on hold if long term viability is to be achieved. No partner wants to risk the future of their firm. Awareness of these risks might be the first stage in avoiding the shame of being that 1 in 3 firm that goes bust this autumn. Partners beware!

This post was provided by Vannin Capital. For advice on Legal Funding visit

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This entry was posted on Thursday, September 19th, 2013 at 1:58 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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