The current challenges of high inflation, interest rate increases, and pressures to increase salaries have led to cashflow pressures on most law firms. Effective management of work in progress and debtors, namely the firm’s ‘lock up’, is crucial for maintaining a healthy cash flow.
Lock up refers to the amount of cash tied up in unbilled fees and debtors, which has become increasingly important. The adage ‘Cash is King’ is vital to allow businesses to meet their tax obligations, to pay salaries and address partner drawings.
Observers have noted a general trend of increasing lock up days – applying to firm of all sizes – with 130 days being the average figure. Even at 100 days of lock up this may equate to ‘locked up’ cash ranging from £400k for smaller firms to over £2m for larger firms, which obviously represents a considerable amount of cash that is un-utilised. Subsequently, the receipt of this cash would also provide further opportunities for other types of investment options.
Manage lock up & improve cashflow
Here are some simple tools to manage lock up and improve cash flow:
- Set appropriate credit terms. If you allow 30 or even 45 days, then this will only add to the lock up time. Why not consider stating the invoice is payable on presentation to lower lock up time;
- Maintain a proactive policy of follow up by your credit control team;
- Invoice promptly when the work is completed. Ensure that the whole team understand this process and work efficiently to raising a final fee;
- Develop strong client relationships. To agree fees up front and payment terms. Use of the phrase “as agreed” on fee notes may reinforce the understanding;
- Allow easy payment methods. processes for client’s whether direct debit, credit or debit card or other varieties of electronic payments;
- Consider staged interim fees. To establish the fee and for stage payments to be made when appropriate that will distribute cash flow during the work being completed; and
- Ultimately for slow or late payers, stop current work until previous fees have been paid and consider whether to continue working with this client.
There are some easy wins in the list above which can help speed up the working capital cycle, freeing up cash and reducing lock-up. If you require assistance in implementing any areas to improve or help further understand your financial position Azets are here to assist.
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