Cash flow: Aged debt and WIP on the rise
The vast majority (94%) of larger UK law firms have been hit by delays in settling clients’ bills since the pandemic began, a report has found.
Almost half (48%) have experienced an increase in billing write-offs of up to 60%, while a further 15% experienced an increase of more than 60%.
Tech firm BigHand based its Legal Cash Flow Report on 800 responses from finance executives and managing partners at law firms in the UK and US with 100 or more lawyers.
“It would be easy to overlook these problems in the light of surging demand,” it said.
“The industry has, in the main, not just come through the pandemic unscathed but actively thrived – due in no small part to incredibly rigorous cost-control measures.”
However, the report said that, from steeply rising costs to fast-escalating client demands and the impact of working from home on operational processes, “the commercial landscape is changing and profitability is under new pressure”.
Researchers said both aged debt and aged work in progress had increased during the pandemic for nearly half of UK firms.
“There are multiple reasons for this rise, including firms taking the decision to support clients with extended billing and payment terms during a time of uncertainty.
“Client expectations have also changed during the pandemic, creating new financial pressures for law firms. Firm clients experiencing financial difficulties are negotiating delayed payment arrangements and/or seeking discounted rates.”
Almost a third (30%) of UK firms said they had applied standard rate discounts or discounting to collect payments.
The vast majority of law firms, 98% in both the UK and US, said they could “identify areas of leakage that influence the firm’s profitability”. In response 29% of UK firms said improving the visibility of financial data over the next two years was a priority for them.
Profit leakage took various forms in the UK, such a lack of matter budgeting (31%), under-pricing work initially (30%), missing or late time entries (29%) or poor scoping of work upfront with the customer (25%).
Firms responded by investing in dedicated financial experts, particularly in the US (70%) as opposed to the UK (58%).
However, UK firms were active in introducing incentives for lawyers as a way to help reduce billing write-offs (41%) or increase overall cash recovery (44%).
Meanwhile, eight out of 10 clients in the UK were “demanding far more financial transparency” or pushing back on payments if expectations have not been met.
“Improved billing visibility and sticking to agreed budgets is not just a tick in the box for clients. Invoices are under intense scrutiny with clients pushing back, on what was worked, by whom, and how long it took. In short, challenging invoices is the new norm.”
A quarter of UK firms (26%) said they expected lawyers to improve the quality of their time entries, while 28% indicated that they planned to create new processes for write-off approvals, “ensuring all decisions are made in line with corporate policies, not individual client or lawyer preferences”.
Researchers added: “While lawyers have spent a lot of time over the past 18 months building client relationships and going above and beyond to support clients during a challenging economic situation, there is now an imperative to add a more commercial focus to the client engagement, one that supports the client and increases firm profitability.”
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