The UK’s top 50 law firms hold on average cash for just three week’s wages, leaving them vulnerable in the case of economic shocks.
Analysis of the accounts of the top 50 law firms by accountancy firm Smith & Williamson and website Legal Week found the monthly payroll was on average £610m, but firms had average cash of just £410m.
This means that if clients do not pay their bills for just one month, the majority of firms could go bust.
Revenue for the top 50 grew to £17.3bn, but at year end £7.6bn of that was unpaid, almost a third of annual income.
Giles Murphy, head of professional practices at Smith & Williamson, said: “The amount of outstanding invoices is concerning. Firms are reliant upon some of this being paid each month to enable them to pay their staff.
“This model works in predictable times, but in more uncertain times law firms need a bigger buffer to deal with volatility in the cash they receive from clients. If there’s a shock to the economic system for example, a no-deal Brexit, clients may decide to delay payments and that could be devastating to law firms.”
The analysis shows revenue is up eight per cent on the previous year, which is above the rate of inflation and reflects a healthy market.
Operating margins also increased to 31.3 per cent from 30.9 per cent the previous year, showing firms are more efficiently turning revenue into profit.