Surveying the scene

The results of the Financial Benchmarking Survey 2024 have now been released, presenting financial performance data on the financial year from 31 March 2022 to 30 April 2023. For over 20 years, the survey has been providing detailed accounting and other financial data from law firms and, for many of those years, has been prepared by specialist accountants Hazlewoods.

As always, the report is a vital and interesting read for managers of law firms and those working closely with them. The survey, which was carried out during the latter part of 2023 and looks mostly at the year-end data of participating firms, is one of the largest of its type and covers a broad range of law firms. Participants this year ranged in size, from relatively small firms to very large national and international firms.

Fee income

This year’s results showed median increases in fee income across firms of all sizes, with an overall median increase of 6.8%. Nearly three-quarters of participants in the survey saw some growth in the year, but the rate of increase slowed a little compared to that of previous years; 34% of participants experienced growth of over 10%, which, although encouraging, is largely reflective of the high rates of inflation that persisted for most of the period.

We saw that firms across all regions reported an increase in fee income and, similarly, we saw growth across all work areas, contrasting slightly with results from the previous year, where changes in income were more variable. The biggest increases were in employment law, at 13.2%; personal injury claimant work and wills, trust and probate also saw strong increases, but most work types saw double digit percentage increases.

We saw a direct correlation between the size of the firm and the range of fee change year-on-year, with the larger firms being more consistent. This is likely due to smaller firms being more susceptible to different financial factors, where even relatively modest changes can have a big impact.

Fee earner performance and staff costs

Maintaining fee earner chargeable hours appeared to be a challenge during the year, and there was a reduction in the median number of chargeable hours from 816 per year to 793 per year. This decline demonstrates a large gap between target hours – many firms target in excess of 1,000 chargeable hours per fee earner – and what firms are able to achieve in reality. Compare that to around 1,600 available hours for a full-time fee earner and it is clear that firms are struggling to get close to 50% chargeability from their teams.

The average fees per fee earner were £147,285, compared to £138,925 the year before, representing an increase of 6%. Firms across most turnover bands saw an increase, apart from those in the £2m to £5m band, which saw a slight fall compared to the previous year. The highest fees per fee earner were in corporate / commercial work, at £169,000.

The median total salary costs (including notional salary costs for partners) represented almost 62% of fee income, which is broadly consistent with last year. It should be reiterated that the 2024 report gathered results during the latter part of 2023, and the majority of participants have either a year end of 31 March or 30 April. It is therefore likely that many firms in the survey had already fixed salaries for their 2023 year ends early in 2022, before many of the cost-of-living increases had really taken effect. So, it is possible that we will see the delayed impact of rising salary costs in next year’s report.

The survey also calculates the breakeven point for a fee earner – that is, the amount of fee income that a fee earner must generate before they start making a profit for the firm. This year, that breakeven figure was £130,610, up from £123,540 in the previous year. When we compare that to the median fee income per fee earner of just over £147,285, it leaves a fairly modest profit margin per fee earner. This also effectively means that, for a firm with a 31 March year end, it takes a fee earner until 19 February to start making that firm any profit at all.

Profits per partner and ‘super profits’

Profit per equity partner (PEP) decreased for the second year in a row, though only by a relatively modest amount, falling by 0.7%, compared to 1.8% the year before. However, it should be noted that there was also a very steep increase in the amount of interest received by firms on money held in their client account due to climbing interest rates. Total net interest income rose from £2.6m to £27.5m, representing an increase of more than 1,000%. If we were to remove the impact of interest earned from both years’ results, we would see that PEP fell by 7.9%.

‘Super profits’, which are calculated in the same way as standard PEP (but after deducting an amount for notional salary per equity partner and notional interest on their capital), fell further than PEP. Total super profit per equity partner was £87,697, compared to £101,375 the year before. In fact, 15% of participants reported a super loss, which effectively means that partners in those firms might be financially better off being employed elsewhere.

The survey also compared the characteristics of more profitable firms to those of less profitable firms. Some of the results were as follows:

Fee earner gearing and fees per fee earner

More profitable firms had higher fee earner gearing – that is, the number of fee earners per equity partner – with 8.6 for more profitable firms versus 6.8 for less profitable firms. This ratio has increased over a number of years.

Fees per fee earner in more profitable firms were higher, standing at £155,000, compared to £132,000 for less profitable firms, while key costs as a percentage of fee income were lower in more profitable firms. Salary costs (including notional salaries) were 58.4% versus 65.6%, while other non-salary overheads represented 25% of fee income versus 32.6%.

Working capital and lockup

Lockup – which represents the amount of work in progress and debtors that are ‘locked up’ in the working capital system – was lower in more profitable firms, at 134 days compared to 147 days for the less profitable firms. While lockup should not necessarily have an impact on profit, because work-in-progress and debtor levels would not normally mean that any more or less income is being generated by fee earners, there appears to be a correlation between higher profitability and better lockup management.

Overall, lockup did not change significantly compared to the prior year, increasing by only one day overall, with work-in-progress days falling slightly and debtor days rising slightly.

Final thoughts

Since 2015, the Financial Benchmarking Survey has analysed information provided by participants and compared it to the SRA’s financial stability warning indicators. The most recent results show that almost one-third of participants in the survey had taken drawings in excess of profits, compared to just over

one-quarter the year before. And 11% of firms had taken drawings in excess of profits for both years. Total borrowings exceeded current assets for just 3% of participants – which is, of course, an encouragingly low statistic – and none of the firms in this year’s survey had borrowings in excess of total partner capital. The level of partner capital increased in more than 50% of firms.

Looking ahead, confidence seemed high and there was median growth prediction of 3.7% across all participants, with an upper quartile growth prediction of almost 10%. Smaller firms were less optimistic and forecast a median reduction of 2.8%.