The following Practice Management guidance note Produced in partnership with Robert Mowbray of Taylor Mowbray LLP provides comprehensive and up to date legal information covering:
This Practice Note looks at some of the most common causes of financial instability in law firms and suggests what needs to be done to ensure problems never develop into crises.
The reason why law firms ultimately fail is because they run out of money, their banks lose faith in their businesses and refuse to provide further finance and alternative finance cannot be raised quickly.
It is usually large payments that bring the issue to a head, eg the payment of rent, VAT and income tax or the professional indemnity insurance (PII) premium.
Law firms vary in their performance, but most are poor in turning time spent on client matters into cash. It typically takes 120 days from doing the work to being paid (this is called lock-up) but firms are expected to pay rent and insurance in advance and the staff at the end of every month. It is not surprising that firms might run out of money quickly.
There are many different things that could happen that might result in a law firm running out of cash, so every firm will need to consider its own circumstances carefully. Some of the more likely issues that could damage a firm’s cash flow
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