A report in the Law Society Gazette yesterday says that a review of leading law firms’ accounts shows that years of enhanced partner distributions and lean approaches to cash management have left firms vulnerable to financial shock.
The study, published by Augusta Ventures, a litigation funder, shows that out of 40 LLPs studied, 55% had insufficient cash on their balance sheets to cover one month’s operating expenses, and 38% would not be able to meet one month’s salary bills.
The review was based on the publicly available financial accounts of the top 40 UK LLP law firms by revenue that report on a consolidated basis.
Firms that are under-capitalised will find it all the harder to deal with the impact of Covid-19, which is inflicting a massive financial shock to all sectors of the economy.
Author of the study, Andrew O’Connor, concludes: ‘The rate of cash burn experienced by law firms during this period will place significant strain on balance sheets.’
Last week a survey of nearly 8,000 legal practices by the Law Society suggested that thousands of high street firms could shut within six months because of financial pressures as a result of the crisis.
Cash flow pressures and lower fee income have put more than half of all the legal practices in England and Wales at risk.
“The shock to the legal services sector has been sudden and severe,’ commented Law Society president Simon Davis.
“There are widespread concerns over liquidity as firms face a dramatic plunge in income with work falling away.
“Although a firm may be open for business, this does not mean it is business as usual.
“Residential property transactions have ground to a halt.
“Reduction in court hearings has massively impacted on the amount of work available – while social distancing and the lack of face-to-face meetings is causing difficulty delivering in other areas, such as the execution of wills.”