Law firm profits fall to 2010 levels, leading to cash-flow warning

Medium-sized solicitors' firms suffered most

Solicitor firms' profits have fallen back to their 2010 levels, with the Law Society of Scotland warning its members about potential cash-flow problems.

Medium-sized firms face the major difficulties, with those with 10 or more partners and sole practitioners enjoying higher profits during 2012.

But, overall, the profits of law firms of all sizes remain lower than in 2008, according to a society survey.

Co-author Andrew Otterburn said: "There has to be a real focus on cash flow."

Cost of Time Survey for 2012, based on the results of 244 participating firms, found average profits per partner had dropped to £64,000 - a fall of £7,000 compared to the previous 12 months and £40,000 less than four years ago.

Law firms' bank balances also fell from more than £200,000 in 2011 to just over £50,000 last year for larger firms, while the average bank balance of those with between two and four partners dropped from £27,000 to £6,000 and five to nine partner firms have also experienced a major fall.

Cash collection

Traditional solicitors' firms in Scotland will soon face additional competition from the first licensed legal services providers, where lawyers will be able to form partnerships with other professions such as accountants and surveyors to provide a wider range of services.

Mr Otterburn, a management consultant, stressed solicitors had to brush up on their business skills as a result.

"There are some practical measures that solicitors can take to ensure that cash flow doesn't become a major issue and they can continue to run an efficient business and improve cash collection in what is still a difficult economic climate," he said.

In recent years, few solicitors' firms have avoided redundancies or moving staff to short-time working, while others have closed or merged, and Law Society of Scotland chief executive Lorna Jack warned the hard times were continuing.

"The cost of time survey is a good indicator of the general health of the profession on an annual basis and it's clear that the effects of the recession are not over," she said.

"The legal services sector is, and will remain, highly competitive. We anticipate the arrival of the first licensed legal services providers in Scotland in the first half of this year and we will undoubtedly see further consolidation."

Not paid a salary

The Law Society stresses paper profits are not the same as actual earnings because equity partners in law firms are not paid a salary and the amounts quoted are often used to fund other parts of the business.

Partners in medium-sized firms experienced the biggest drop in profits during 2012, with two to four partner firms falling from £75,000 to £67,000 in 2012 and five to nine partner firms having a £4,000 fall to £76,000.

However, sole practitioners experienced an average increase of £7,000 to £53,000, while firms with 10 or more partners had a rise from £144,000 to £163,000 per solicitor.

The gap between the profits per partner in larger firms with 10 or more equity sharing partners and those in smaller firms increased by £79,000.

Currently, 3,634 solicitors work as either partners or employed solicitors at the 30 biggest firms in Scotland, while a further 4,280 solicitors, work in 566 high street firms.

There are 628 sole practitioners, while 2,057 solicitors who work in-house within other businesses do not contribute to the survey.