Is your practice’s ‘lockup’ under control?

Benchmarking surveys typically suggest average lockup for legal practices of up to 130 days, or in other words well over 4 months, with less efficient practices exceeding this already high level.

Lockup is the total value of unbilled work in progress plus debtor balances remaining unpaid. In effect, this represents working capital requirements. As the majority of a practice’s running costs are fixed in nature and paid on a monthly basis such as salaries, rent, insurance as well as partners’ drawings this inevitably creates a funding gap which is exacerbated as the level of lockup increases.

To give some context, a £5m turnover practice with a lockup of 130 days will have £1.78m tied up in work done yet to be billed or paid for. Inefficient lockup means that practices are essentially extended borrowing facilities for their clients. Legal practices are not banks so why should they act like it?

Lockup has to be funded and this will generally include bank borrowings, partner capital contributions and a restriction in the level of profits drawn by partners. Although there is a balance to be struck between debt and partners equity/capital, inefficient lockup means that partners will not be able to easily access their well earned fees and profits. High level of lockup also elevates the level of credit risk, particularly in the current inflationary economic climate.

The control of lockup is not complicated but can often be neglected. A combination of small individual changes can have a significant impact and such measures should include:

• Interim bill where possible
• Bill immediately on completion rather than delaying until month end
• Set client expectations on billing in advance rather than negotiating fees after the work is completed
• Formalise credit control procedures and enforce credit terms
• Fee earners (including partners) should take responsibility for billing and credit control procedures
• Review lockup and KPIs for fee earners and consider incorporating this into profit sharing and appraisal systems
• If a client has a history of late payment, consider advance payment on account or whether you should be acting for the client in the first place

Lockup efficiencies will improve cash flow, reduce credit risk, and allow partners and business owners to benefit from profits achieved.

If you would like assistance to review and improve lockup in your practice, please contact our EQ Professions team via professions@eqaccountants.co.uk or call one of our offices.