Kate Arnott at MHA on how firms can significantly reduce their lockup rates
Cash remains king in professional services firms, with poor cashflow being the largest contributor to the failure of law firms in recent times.
Lockup therefore continues to be a hot topic, as the amount of cash tied up in either work-inprogress (WIP), or debtors, directly impacts the ability of partners to draw profits. It can also threaten the very existence of firms.
So why worry? Because lockup represents WIP not yet billed and debt not yet collected – effectively the amount of cash that could be available for use in the firm. This issue is exacerbated in law firms, as the majority of overheads are fixed and have to be paid, regardless of work completed.
Suppliers enforcing 30 to 45-day credit terms have to be balanced against ‘potential cash’, which may sit in WIP for 60 days and then take a further 60 days to be collected from clients. Any gap in working capital availability usually has to be bridged with further capital investment by partners and means limitations on partners’ drawings: a double hit to individual partner finances.