The income of firms polled in the 2016 Law Management Section (LMS) Financial Benchmarking Survey has increased for a sixth consecutive year, with a median rise last year of 5.4 per cent, despite a challenging year.
The 2016 survey findings are generally positive, with net profit per partner rising for the fifth consecutive year and now standing at £146,600 per partner.
Law Society president Jonathan Smithers commented:
'The Law Society welcomes the news of a continuing increase in income for the majority of firms surveyed, particularly after the challenges of the last decade. Our Future of Legal Services report brings together new and existing evidence to identify the key drivers for change over the next five years, together with the opportunities and potential threats. Having good management helps firms financially, which will be important for them to remain sustainable in the face of increased competition.'
One area of concern, however, is that a quarter of participating firms' partners took more money out of their firms than they made in profits, up from a fifth last year. For law firms to remain financially sound, it is important that a considerable amount is retained to fund working capital.
LMS chair Robert Banner warned:
'The firms that take part in the Law Society Law Management Section Financial Benchmarking Survey usually have a particular interest in high performance and management. If a quarter of these firms are over-drawing, then the proportion over-drawing for the rest of the profession is likely to be higher. The resources we offer to members support firms to improve management processes across the board, including on this vital issue.'
The Financial Benchmarking Survey also indicates:
- increased fee income across most work types and most regions
- a rise in the breakeven point for a fee earner, up from £102,000 last year to £109,000 this year, mainly due to increases in fee-earner costs and non-salary overheads
- that firms have a reasonably good handle on lock up (work in progress and debtors)
Paul McCluskey, head of professional practices at Lloyds Bank Commercial Banking, which sponsors the survey, commented:
'The last 12 months continued to offer challenges for many law firms and, although the majority of results are encouraging, a key priority for all firms in 2016 will be to effectively manage their cash flow.'
Jon Cartwright of Hazlewoods, which undertakes the survey on behalf of the Law Society Law Management Section added:
'There is no doubt that most mainstream legal practices are in good shape financially and more confident as a result. Medium-term strategy planning is now firmly back on the agenda, although clearly some areas, such as personal injury and criminal, continue to be tricky'
The 2016 LMS Financial Benchmarking Survey was based on questionnaires completed by 200 firms from across England and Wales with a combined income of £1bn. The full survey results will be published in March 2016 with participants receiving a free copy of the report, including a firm-specific findings booklet. Other firms can purchase the report.
Responding to the headline report findings, Paul Bennett, a professional practice and regulatory partner with Aaron & Partners LLP, said firms with excess drawings should 'Take advice now and improve their firm's drawings position in the short to medium term given that lenders and the Solicitors Regulation Authority (SRA) are often concerned by financial mismanagement of this type. If it is being addressed, the pressures will be much less as we go through 2016/7.'