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How do you compare?
The 2019 LMS Financial Benchmarking Survey, written by Calico member Hazlewoods, has just been published, and the findings make interesting reading.
The benchmark survey is a voluntary annual survey, and is not intended to be representative of solicitor firms in England and Wales. Participants tend to be larger and more profitable than firms generally (although that is not the case for all firms), and therefore the results tend to be more positive than those of rival surveys.
This year, 210 firms with a combined income of over £1.1bn, have taken part in the survey, making it one of the largest benchmark surveys of its kind in England and Wales, and participants provided two years’ data, to allow true like-for-like comparisons. As in previous years, the report looks at a number of detailed accounting and business metrics driving financial performance, and allows users – particularly from the mid-market – to benchmark their performance against peers, and, to an extent, over time.
The analyses include the following:
- Fees per partner and per fee earner
- Fee earner gearing (the ratio of fee earners to equity partners)
- Staff costs (both fee earners and support staff)
- Net profit percentage
- Lock-up (i.e. WIP and debtors)
- Partners’ capital and borrowings
Increased fee income
For the ninth year in a row, the findings from the benchmark survey show increased fee income, with a median rise of 4.2%, although the composition of the sample will have varied over that period. Growth was experienced across all regions of England and Wales, and in most work types. Many firms also saw a rise in interest income, driven by the increases in base rates in November 2017 and August 2018. Increasing numbers of firms are now holding the top slice of their client money in SRA-compliant term deposit accounts. Following on from a slight reduction last year, expenditure on employed fee-earners (including fixed-share partners and consultants) as a percentage of fee income increased slightly, to a median of just over 30%.
Recruitment and staff retention is an issue for firms
Recruitment and staff retention are a real challenge for many firms at the moment, and this is forcing many firms to increase salary levels. The recent rise in employer contributions under pensions auto-enrolment has added to this. Expenditure on non-salary overheads, including IT costs, marketing and accommodation has changed very little this year. Professional indemnity insurance premiums held steady, although firms should budget for an increase this year, particularly on the cost of top-up cover.
Profit per equity partner is up
Profit per equity partner (PEP) has risen by a median of 1.4% to £152k, although this does not take into account notional salaries for equity partners. After including a deduction for notional salaries and notional interest on partner capital, the median figure for “super-profits” was £46k in 2018, compared to £43k in 2017 – an increase of 8.5%. The median super-profit percentage was 6.4%.
Cash flow and lock up indicators
Cash flow continues to improve for many firms, helped by a reduction in lock-up (the amount of cash tied up in work in progress, unbilled disbursements and debtors). Total lock-up fell by a median of six days between 2017 and 2018, which may not seem a lot, but for a firm with £5million turnover, a similar reduction would free up £82k of cash.
If you would like to find out more, the benchmark survey is free to download from the Law Management Section website here.
Do contact us at Hazlewoods if you would like more information or to talk about any aspect of law firm finance or strategic planning.