Data from the Law Management Section’s 2017 Financial Benchmarking Survey shows continued improvements for most participants, but there are warning signs that some practices are slipping back into bad habits, warns Andy Harris
Widely regarded as the leading annual health check for mid-sized firms, the Law Management Section’s 2017 Financial Benchmarking Survey brings together the results of firms across the country to provide a comprehensive analysis of their comparable financial health. It was published last week.
Most of the key metrics show improved financial performance, but there are some warning signs that a small number of practices are slipping back into bad habits.
Fee-earner income increases
For the seventh consecutive year, participants have seen an increase in fee income, with a median growth of 5.8 per cent, following a 5.4 per cent increase last year. Median fee income per equity partner also increased, by 7.1 per cent, from £560k to £600k. This can be attributed to a small increase in the ratio of fee-earners to equity partners, as fee income per fee-earner remained unchanged year on year, at a median £119k.
Salary costs impact super-profits
In recent years, total salary costs have increased very little, partly as a result of practices increasing fee-earner numbers with lower-earning individuals. Fee-earner retention and recruitment challenges are putting greater pressure on some firms to increase salaries. This year, the median cost of an employed fee-earner rose by 3.8 per cent, to £41,780. On the other hand, the median cost of a member of support staff fell slightly, from £22,333 last year to £22,052. Over the next 12 months, most smaller practices will reach their staging dates for pensions auto-enrolment, will add increasing amounts to the salary bills of those that do not already pay fairly generously into employees’ pension pots.
Total salary costs, including notional salaries for equity partners, amounted to a median 59 per cent of fee income. When a figure for non-salary overheads is included, the breakeven point for a fee-earner – beyond which any fee income will contribute to profit – was £106,245. So if a practice has a 31 December year end, on average it takes until 21 November before a fee-earner earns sufficient fees to cover their total costs for the year, and for the practice to reach ‘super profits’.
Profit per equity partner still on the rise
Median profit per equity partner (before notional salary) has increased for the seventh year running. The median net profit per equity partner for the participants in our survey was £135,979 in 2016, compared to £125,340 in 2015 – a rise of 8.5 per cent – with smaller practices seeing the largest increases. If this is adjusted to include notional salary and notional interest on capital for equity partners, this gives a median ‘super profit’ of £55,941. The median super-profit as a percentage of total income increased from 9.5 per cent in 2015 to 10.1 per cent in 2016.
Lock-up and borrowings improves
Finally, it seems that practices are getting better at managing their overall lock-up, with reductions in both work-in-progress and debtor days. There has also been a reduction in the level of total practice borrowings per equity partner, from £52k to £45k: on the face of it, a positive change, unless the reduction has been driven by a withdrawal of funding facilities.
Beware drawings in excess of profits
In the 2016 report, we noted that partners in a quarter of participating firms had taken drawings (including income tax) in excess of profits; this trend continued in 2016, with similar numbers. Almost one in 10 has taken drawings in excess of profits for two consecutive years, compared to six per cent last year.
The Financial Benchmarking Survey is produced by the Law Society’s Law Management Section, in association with Hazlewoods LLP, and sponsored by Lloyds Bank Commercial Banking. Now in its 17th year, the survey is essential for small to medium-sized firms to help them make effective, evidence-based decisions for their businesses.
This blog is based on an article originally published in the January 2017 edition of Managing for Success, the magazine of the Law Management Section.
Pressures on cashflow are as strong as ever, and practices need to be mindful of the lessons learned over the last few years, particularly at a time when there is so much uncertainty about the future of the legal sector and economy as a whole.