Monitoring your financial stability—looking out for the warning signs
Produced in partnership with Robert Mowbray of Taylor Mowbray LLP
Monitoring your financial stability—looking out for the warning signs

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:

  • Monitoring your financial stability—looking out for the warning signs
  • Why might law firms become unsustainable?
  • What should you look out for to make sure you remain viable?
  • Managing the risk of becoming financially instable

This Practice Note looks at some of the most common causes of financial instability in law firms and provides some suggestions on what needs to be done to ensure problems never develop into crises.

Why might law firms become unsustainable?

Many traditional law firms have been run in a very prudent way with:

  1. the business taking on no or minimal debt, and

  2. the partners providing the necessary finance both for the day-to-day financing of working capital and for new investments

Such a prudent approach will greatly reduce the risk of the business running out of money.

The reason why law firms ultimately fail is because they run out of money and their banks lose faith in their businesses and refuse to provide further finance. At such a point, a firm might fail if 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

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