Legal Business Blogs

NatWest SME law firm report warns lock-up a concern although business climate positive

With an average revenue growth of 5% in 2016, the business climate for small to medium size (SME) firms with income under £123m in the UK has been generally positive, according to the latest NatWest Legal Benchmarking report out today (30 March).

The report, which surveyed 269 firms, states that firms should look to reduce their lock-up, which, at an average of 113 days is now longer than at any time in the last five years and four days longer than last year. The research suggests that without a constant flow of new matter starts and paid fees, firms would on average run out of cash within 40 days.

NatWest’s head of professional sectors Steve Arundale said: ‘Lock-up at firms has slipped which confirms that busy lawyers aren’t very good at collecting their fees. Forty days is significantly less than most people would think, and firms are great at posting profit but not as great at managing their cash position.’

Issues around productivity are also highlighted, as firms are focused on coping with ‘increased workload’ and taking on more headcount. This is shown through a reduced net profit at 23%, the lowest throughout the history of the report.

‘However small to medium size firms are in pretty good financial shape on the back of some very positive years post-recession for revenue growth, as PEP is growing too,’ added Arundale.

Eversheds Sutherland managing partner Lee Ranson said: ‘I agree with the report’s generally positive outlook. Specifically, the market did hold up much better than people expected post-referendum. However, there is a degree of uncertainty, and I think this is starting to be felt in certain areas so that people are cautious, particularly around new investment.’

The report suggests that as firms get larger they find it increasingly difficult to manage lock-up, with the average length for small firms (revenue under £2.25m) at 84 days, for large firms (£2.25m-£10m) it is 131 days and for very large firms (£10m plus), it stands at 142 days.

Ranson (pictured) added: ‘I feel certain that if we sat our clients in a room and showed them these lock-up statistics they would be very surprised that as a profession we allow these averages to occur. Clients want us to be more efficient and part of helping us achieve that is to run ourselves more efficiently as businesses.’

Arundale said that billable hours figures show productivity is still relatively low. He added: ‘Our advice to firms is to focus on improving that number of billable hours before rushing out to recruit more headcount to service revenue growth’

Looking ahead, 36% of firms surveyed expect their bank balances to improve compared to 46% last year, while only 11% expect their balances to fall.

Meanwhile, 63% believe that fee income will grow over the next year, down from 81% in 2015 and 43% believe that margins will improve in 2017, 2% less than last year.

‘Confidence is generally still good, firms think life will be okay. Confidence dropped slightly from the previous year and as a result feedback is coming through, but when I’m out in the field, many firms are still very busy which I find encouraging as there doesn’t seem to be a specific Brexit issue in SME domestically-focused firms,’ Arundale concluded.