Why become a solicitor if you want to do banking?

This year, for the first time, participants were asked to provide information about their firm’s bank position and also the amount they were carrying on behalf of clients in respect of outlays – money they have paid out on their clients’ behalf but have not yet been reimbursed.

The survey indicates a tremendous variation both between firms of the same size and firms geographically. Figure 1 highlights the very high level of outlays carried by many Edinburgh firms – almost certainly due to Court of Session work – and also the relatively low level carried by Glasgow firms.

On average Edinburgh firms are carrying nearly £30,000 in outlays, and a quarter are carrying in excess of £74,000. A quarter of Scottish firms with more than ten partners are carrying outlays in excess of £427,000.

It has often appeared in financial management seminars run on behalf of Update that Glasgow firms took a more commercial attitude towards collecting outlays from clients. This appears to be borne out by the above figures, with average outlays per firm in Glasgow of just £10,000. The chart indicates higher levels of outlays elsewhere in Scotland, in particular amongst rural practices.

In some cases there will be little firms can do about the level of outlays they carry – unions, for example will often not reimburse outlays until the matter concludes, and the same is true in speculative actions. In other instances however firms are often carrying the outlays – in effect acting as bankers for their clients – because that is the way they have always done it. Some solicitors would almost view it as unprofessional to ask for money “up front” – it is as if they are doubting their client’s creditworthiness.

But why should you act as banker to your client? Why should your firm’s overdraft be high and under pressure when others may be adopting a more commercial approach with their clients and asking for payment of outlays “up front”?

This difference in approach on outlays will be one of the factors contributing to the variation in the bank position of firms, as illustrated by Figure 2.

This indicates that a quarter of Edinburgh firms have overdrafts in excess of £166,000 – an average of £25,000 per profit-sharing partner. For the country as a whole, the average balance on firm’s account is actually a balance in hand of £700. A quarter of firms have balances in hand over £31,000, and a quarter have overdrafts in excess of £25,000.

In addition to your approach to outlays, other factors that will impact on your bank position will include how good you are at chasing overdue debts, your drawings policy and the overall balance between partner capital and borrowings.

Banks often work on the basis that a firm’s fixed capital and core working capital should be provided by partner capital and long-term debt, with the overdraft funding day-to day peaks. Problems often arise when the overdraft is funding more than these peaks, and is in particular funding an excess of drawings over profits.

Firms that have wanted to improve their bank position have often found their firm’s outlays a good place to start. Have you thought about asking for payment from clients in advance in respect of outlays? One delegate to an Update seminar from St Andrews left commenting that he had just never seriously considered asking for the client’s cheque at the start in respect of outlays. He thought many of his clients would have no objection to paying – and his overdraft could be reduced by perhaps £20,000.

If you are an Edinburgh firm undertaking Court of Session work, have you raised the issue of obtaining payment for outlays from the client with your correspondent firms? Is it not in their interest as well as yours to bill the client at regular intervals? Does not the client also like to receive regular bills – when we undertake client surveys for law firms the one message that consistently comes through is that clients prefer regular billing – what they do not like is one large bill at the end.

If you do undertake work that inevitably results in high levels of outlays – such as speculative work – have you considered the outlay funding scheme set up by The Law Society and run by First National Bank (formerly Investec)?

Perhaps the main message to be highlighted by these new benchmarks is that the traditional approach to outlays is changing – increasingly firms are asking for them in advance – and clients are paying them. Perhaps we should also remember the advice in Hamlet – “neither a borrower nor a lender be” – Polonius was clearly not trying to run a solicitors’ practice in the 21st century!

All participating firms have received a free copy of “The 2000 Survey of Law Firms in Scotland”, the detailed report upon which this article is based. Other firms can purchase a copy of the full report which contains a number of useful statistics and performance indicators. Priced at £80, this is available from Lisa Anderson at the Society.

In early April the President will be writing to all firms inviting them to participate in the 2001 survey. Participation is free and carries a two-hour CPD credit as well as a copy of the survey report. In recent years there has also been a prize draw, which will continue in 2001. In 2000 the prize – of a weekend at Cameron House – was won by Jim Morrison of Sneddon Morrison in Shotts (as reported in the November issue of the Journal). The Society is again grateful to Alex Quinn for agreeing to sponsor the prize in 2001.

John McCutcheon is Professor of Actuarial Studies and Head of the Department of Actuarial Mathematics and Statistics at Heriot-Watt University. He is a member of the Society’s Remuneration Committee and, since 1980, has conducted the annual Expense of Time Survey.

Andrew Otterburn is a management consultant and contributor to Update courses on practice management. His book on the Profitability and Financial Management of legal practices is published by the Law Society in London.