Financing

Introduction

A number of factors have caused law firms to re-appraise their financing arrangements during the year. These include the need to fund investment in systems and new technologies, workplace changes or simply the need to re-visit financing levels and structures that have been in place for some time. There has been limited movement in capital account balances across, although there has been a general increase in UK current account balances across most firms. This years’ survey does show that firms are beginning to take action to address the lock-up challenge which has been a consistent negative theme for many years.

Read our 'at a glance' preview below for more on this section.

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At a glance

Lock-up

  • Year end lock-up performance has deteriorated in Top 11-25 and 26-50 bandings by 1 day to 122 and by 9 days to 129 respectively. Top 10 firms have posted a small improvement from 124 to 123 days, whilst Top 51-100 firms significantly reduced year end lock up by 11 days to 135.
  • There remains a significant gap between average and year end lock-up (between 13 and 19 days across all bandings). 
  • Significant opportunities still exist for firms to improve their ‘matter-to-cash’ performance and reduce their dependence on external debt. For example, an average Top 10 firm could generate £16.3m of cash by reducing lock-up to 108 days, being top quartile performance.
  • The survey demonstrates that firms are beginning to take action to address the lock-up challenge. More firms, for example, are linking remuneration to partner lock-up performance or introducing sanctions on distributions. In the Top 10 this year, 70% reported that equity partner remuneration was now linked to lock up performance and 50% for non-equity partners.
  • Lack of sanctions and incentives was cited by a third of Top 10 firms as the most significant reason for ineffective working capital management. Alongside this, problems persist around contract set-up, billing, WIP management, collection processes and data quality. All of these aspects are roadblocks to developing a cash conscious culture.
  • Leading firms are making progress through initiatives including: (i) building standard terms into contracts; (ii) streamlining e-billing; (iii) enhancing practice management systems to support integrated time recording (i.e. automated timesheet entry through to billing); (iv) setting meaningful KPIs & targets linked to remuneration, with both sanctions and rewards; and (v) using data analytics to equip practice staff and partners with user-friendly visualisation of performance.

Funding

  • This year saw a reduction in the proportion of external funding for all bandings except the Top 11-25, which saw an increase from 19% to 21%. In the Top 10, there was a drop from 20% to 18% which reversed the trend seen in 2017. This could well be a result of increased profitability and the knock-on effect of an increased partner current account. Partner current accounts have increased across most bandings as follows: Top 10 by 17% to £639k, Top 11-25 by 29% to £487k and Top 51-100 by 14% to £295k.
  • We are seeing a heightened interest across the sector in considering alternative sources of finance, including IPO, private equity investment and litigation funding. 
  • There has been a drop off in facility renegotiations compared to prior year, particularly for firms below the Top 10. The majority that did renegotiate facilities, increased their level of borrowing (63% of all Top 50 firms).
  • With the exception of the Top 10, which remained consistent at 55%, the proportion of profit distributions paid in the year it is earned fell. This was most notable in the Top 11-25 category that saw a fall from 58% to 49%.

Contact us

Stephen Tebbett

Partner, PwC United Kingdom

Tel: +44 (0)7717 782240

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