Top 50 LLP accounts: profiting from growth?

This year’s analysis of the UK’s top 50 law firms’ audited financial statements (where they operate as UK LLPs or companies) for the year ended in March or April 2023, appears to show the UK legal market in rude health.

Total revenue for the top 50 firms was just under £24 billion, up 8.54% on the previous year.  However, during the period of these results, UK inflation peaked at over 11%, and this has clearly impacted firms’ cost base, as average operating margin fell from 33.11% in 2021/22 to 30.77% in 2022/23.

Firms are, therefore, less efficient at converting every £1 of revenue into profit. Perhaps more worrying, is the fact they have also become more inefficient at converting this revenue into cash. While revenue on average increased by 8.54%, the amount of client invoices unpaid at the end of the firms’ financial year increased by almost 12.1%. In other terms, almost £7 billion was owed to the top 50 UK law firms at the end of their 2023 financial year, which represents more than a quarter (29.1%) of their annual revenue.

It will perhaps be no surprise to hear that there has been a significant impact on the cash held by firms, with costs increasing faster than inflation and lock up worsening. During the pandemic, as some firms took on additional government-backed loans, costs were slashed and most firms were still regularly paid, the cash held by law firms reached a high. However, the net cash held by the top 50 law firms at the end of their 2023 financial year had fallen over the previous 12 months by £1bnm, down from £2.5 billion to £1.5 billion.

Clearly, this is a trend that can’t continue without consequences, especially as it comes at a time when firms are looking to further invest in areas such as brand, lateral hires, upgrading premises and, perhaps most significantly, Information Technology. This type of expenditure typically results in a cash outflow, before the benefits generate a net cash inflow, but this reversal may take several months or even years to come through. In addition, in January 2025, firms that do not have March year ends will experience the first of an additional cash outflow, as tax payments made on behalf of their partners will be accelerated under new HMRC Basis Period Reform rules.

Revenue growth is important for all firms, but a focus on ensuring profits grow by at least as much is crucial. If this is not converted into cash, firms could find the ability to invest in their future significantly constrained.

For full details of the analysis of the top 50 firms’ financial statements for the year 2022/23, download our report here.

If you would like to see how your firm compares to the top 50, please fill out your details here and a member of the team will be in contact to benchmark your firm using our interactive dashboard.