Lock-up is often an uneasy subject of discussion at partners’ meetings. But there is no getting away from it – it is something all law firms should be managing effectively.
By now, you’d think the penny would have dropped for legal practices. However, a number of surveys over recent years show that the problem may well be getting worse.
Recent surveys suggest that over one-third of UK law firms have lock-up in excess of 150 days. Even the average level is around 130 days. No self-respecting managers in non-legal businesses would find this state of affairs acceptable.
Let’s get the definition correct before looking at the problem and its potential solutions. Lock-up is defined as the sum of unbilled work in progress and debtors (excluding VAT).
It doesn’t sound so bad when you say it quickly, but excessive lock-up can have serious side-effects. If you have an annual turnover of £1million and lock-up of 150 days, that’s £410,000. Or more accurately, it means you don’t get paid for work until 5 months after completion. That doesn’t help you pay your staff and overheads and it will cut into your drawings savagely.
It gets worse. You are, in effect, bankrolling your clients meaning you may have to borrow from your bank. So, how can you resolve the problem?
It always pays to be open with your clients about billing from the get go. You can do this by:
These points are all very well when you’re instructed. What can you do to reduce lock-up once the work has commenced?
It’s all about cashflow management. On your balance sheet and P&L your firm may look healthy and profitable. But remember, businesses go bust not through lack of profit, but through inability to pay the bills. You may wish to consider outsourcing your legal cashiering to improve performance. Take a look at LawWare’s sister company Your Cashier for further details.
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