Effective management of lock-up is crucial to maintaining a law firm’s financial health. Over recent years there has been a steady increase in lock-up periods - the time it takes to convert work in progress into a bill and then to transform that bill into cash – and so it is more important than ever that firms have strategies in place to improve their cash flow and maintain stability.
Lock-up periods, typically calculated in days, are increasing as a result of a number of factors. These include the persistent and growing backlog in courts, economic pressures on clients leading to delays in payments, corporate transactions taking longer to complete and property market fluctuations, where again transactions are taking longer to finalise.
The main work types we see affected tend to be personal injury and clinical negligence, probate and litigation, although other areas are experiencing similar challenges.
Problems for law firms with excessive lock-up
The extended period between performing work and receiving payment creates significant pressure on cash flow and working capital, affecting a firm's ability to cover staff salaries and operational costs. If the lock-up period increases, so too does the pressure on a firm’s finances.
While your balance sheet may appear healthy due to substantial WIP and debtors, cash flow constraints due to excessive lock-up can affect your ability to pay bills and could lead to financial distress. Having capital tied up in WIP and debtors also limits opportunities for growth and investment within the firm.
Extended payment periods effectively mean you become a bank for your clients, meanwhile it directly impacts partners’ personal income, reducing available funds for drawings.
6 effective strategies for managing lock-up
By implementing strategies to manage lock-up periods and by regularly reviewing lock-up, law firms can improve their financial position. The key to this is to bill for work in the stages it is carried out, not just at the completion stage. The weeks and months of work going into each matter have value and so any updates a client receives should be match with a fee raising opportunity.
1. Transparent billing practices
Set clear expectations with clients from the outset by agreeing on specific billing terms and interim billing points at key stages. Implement regular billing updates to keep clients informed of accruing costs, and consider requesting upfront payments, particularly for new clients and property-related matters. Offering convenient payment options will also improve this process.
2. Timely invoicing
Invoice immediately upon completion of interim tasks or implement regular monthly billing cycles where appropriate. Utilise practice management software to flag billing opportunities.
3. Strengthen your firm’s credit control
By implementing a disciplined credit control system this will help ensure payments are received in a timely manner. Consider outsourcing credit control functions if you lack an internal team or, alternatively, involve partners and fee earners in collection processes and incorporate this into performance metrics. Enforce interest charges on overdue accounts where your client agreements permit and be prepared to pause work on matters with significant outstanding balances.
4. Client assessment
Regularly evaluate clients with histories of late payment and consider whether it is worth retaining consistently problematic payers.
5. Proactive cash flow management
The inability to pay bills is what typically gets firms into financial distress, not a lack of profit. You might want to consider working capital financing options and establish relationships with lenders before urgent needs arise. It is also important to seek expert advice at early signs of cash flow pressure rather than waiting for crisis points.
6. Strategic practice area balance
Firms focusing exclusively on areas with inherently lengthy matter lifecycles (such as clinical negligence) should consider balancing their practice with service lines that offer quicker returns. This creates a more sustainable cash flow position across the business.
Improve your position
By implementing these strategies law firms can improve cash flow, maintain stability, and position themselves for sustainable growth. Regular monitoring helps identify and address issues before they become critical problems, ensuring your firm can operate effectively and profitably.
For support with the management of your lock-up please get in touch. Call 0808 144 5575 or email help@armstrongwatson.co.uk.
