A profitable law firm can still experience significant cash pressure. One of the most common reasons is poor lock-up management. Max Masters explains more...
Lock-up measures the time it takes a firm to convert work undertaken into cash received. It is generally calculated by combining:
- WIP days, covering the period between work being carried out and the bill being raised
- Debtor days, covering the period between the bill being issued and payment being received
The longer this cycle becomes, the more working capital remains tied up in unfinished billing and unpaid invoices. In effect, the firm is funding its clients’ legal work while continuing to meet salaries, tax liabilities and other operating costs.
Small improvements can release substantial cash
The financial effect can be considerable.
A firm generating £10 million in annual fee income earns approximately £27,000 in revenue each day. At 120 lock-up days, around £3.2 million may be tied up in WIP and debtors. Reducing this to 90 days could release approximately £800,000 in cash.
That improvement does not depend on increasing fees, cutting staff or reducing investment. It comes from converting work already undertaken into cash more efficiently.
Where delays arise
Lock-up is influenced by several interconnected stages.
Late or incomplete time recording can delay billing and distort the value of WIP. Work may then remain unbilled because billing decisions are postponed, matters are not reviewed regularly or firms wait until completion rather than billing at appropriate milestones.
Once invoices are raised, unclear payment terms, inconsistent follow-up and reluctance to challenge valued clients can contribute to growing debtor balances.
These issues are rarely the responsibility of the finance team alone. Effective lock-up management depends on fee earners, partners, management and finance teams working to shared expectations.
More than a finance metric
For fee earners, time recording, billing and debtor management can sometimes feel separate from client work. In reality, they form an important part of delivering matters effectively.
Prompt billing can improve transparency for clients, reduce the risk of unexpected costs and enable questions to be resolved while the work remains fresh. Regular WIP and debtor reviews can also identify matters where scope, pricing or client communication require attention.
Lock-up should therefore be treated as a firm-wide operational and strategic priority, supported by clear processes, meaningful management information and appropriate accountability.
Read the full article
In the latest edition of The Legal Abacus, Max Masters examines:
- practical controls for time recording, WIP and debtors
- the cultural and structural barriers that make lock-up difficult to address
- the potential financial benefits for small, mid-sized and larger firms
- practical steps firms can take to improve cash conversion
- the role of KPIs, management information and early intervention
ILFM members can read the full article in The Legal Abacus.
Max Masters FCCA ACA is an ILFM tutor, a member of ICAEW and ACCA, a member of the ICAEW Solicitors Advisory Board and Head of Client Money at Kreston Reeves.
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