Andy Harris looks at the results of this year's Financial Benchmarking Survey.
The results of the Law Society Law Management Section's 2016 Financial Benchmarking Survey have recently been published. Once again, the findings are largely positive, although there are indications that some practices may be slipping back into bad habits.
This year, 200 firms from across England and Wales have taken part in the survey - an increase of about 25 per cent on last year - making it one of the biggest of its kind in the UK. The survey is widely regarded as the leading annual health check for mid-sized practices. As in previous years, participants provided two years' worth of data - the most recent accounting period and the previous one - allowing us to compare results on a like-for-like basis.
For the sixth year in a row, participants have seen increased fee income, with a median growth of 5.4 per cent, following an 8.7 per cent increase last year. Growth was consistent across practices of all sizes, and most geographic regions and work types have seen increases, particularly residential conveyancing and company commercial. Criminal law and personal injury teams (claimant and defendant) have seen a reduction for the third consecutive year.
The ratio of fee-earners to equity partners has remained steady, at a median of 5 to 1. However, over the last few years, we have seen a falling ratio for smaller practices, and the opposite for larger practices. The median ratio for the most profitable practices in the survey was just under eight to one.
Total salary costs have increased little over the last few years, partly as a result of practices increasing fee-earner numbers with lower-earning individuals. This year, we have seen the median cost of an employed fee-earner, including notional salaries for equity partners, rise to £48,029 per fee-earner, from £44,472 last year. The median cost of a member of support staff has also increased, from £20,357 last year to £21,538.
As a result, total salary costs, including notional salaries for equity partners, now amount to a median 57.6 per cent of fee income. When we include a figure for non-salary overheads, the breakeven point for a fee-earner, beyond which any fee income will contribute to profit, is £108,829.
Median profit per equity partner (before notional salary) has increased for the sixth year running. The median net profit per equity partner for the participants in our survey was £142,562 in 2015, compared with £138,784 in 2014 - a rise of 2.7 per cent - with smaller practices seeing the largest increases. When this has been adjusted to include a notional salary for equity partners, this gives a median 'super-profit' of £70,702. Last year, we reported that 11 per cent of participants had seen a super-loss - that is, a negative super-profit - and this increased to 14 per cent in 2015.
Paul McCluskey, head of professional practices at Lloyds Bank Commercial Banking, commented on the findings in this year's survey:
'As sponsors of the survey, it is pleasing to see responses at their highest levels since 2006. The survey has delivered another year of improved results across many metrics, and it is particularly encouraging to see increased fee income across the majority of regions.
'A firm's financial success requires a strong culture that is supported by the entire team, but where individuals display the right behaviours that will ultimately deliver the strategic plan of the business.
'To discuss your 2016 plans and how we can support these, find your local accredited manager.'
Last year, the financial stability of many participants had improved, but the findings from this year's survey suggest a reversal. In 2014, partners' total drawings (including income tax) exceeded profits for a fifth of participants; in 2015, this increased to a quarter of practices. Some of this will no doubt be due to a timing difference (ie when partners decide to withdraw profits), so hopefully practices have remembered lessons learned. The fact that just 6 per cent of partners took drawings in excess of profits for two consecutive years, 2 per cent fewer than last year, supports this.
Continuing the positive note, just one in 10 practices told us that they were operating close to their overdraft limit, compared with one in eight last year, and borrowings exceeded total partner capital in just 1 per cent of participants.
Partner capital increased in almost two-thirds of practices, with an average combined capital account, current account and tax reserve balance of £179,199 per partner, and partners in all but one practice were completely up to date with their personal tax liabilities.
Finally, a quarter of practices indicated that they were likely to merge with another practice within the next few years, down from a third a year ago, and just 15 per cent told us that they were currently considering a merger.
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Original article first published in the February 2016 edition of Managing for Success, the Law Management Section magazine