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Revenues drop at one in five mid-sized firms

‘Disappointing’ to see regional firms’ WIP days trail behind City counterparts

11 September 2017

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About 20 per cent of firms with revenues of less than £10m have experienced a drop in revenue last year, compared with only 14 per cent in 2015, in a market where overall growth was 7 per cent, according to recent research.

The latest annual benchmark report by business advisers Crowe Clark Whitehill shows that, by comparison, firms with revenues between £10m and £20m grew on average by 9 per cent.

The decline in revenue in the mid-market – broadly defined as regional firms – was accompanied by a drop in profit per equity partner for 40 per cent of firms, while in the City, mean PEP went up by 12 per cent.

Among the regional firms that experienced growth, only 28 per cent grew by 10 per cent or more. In previous years, that figure stood at 52 per cent for 2015, and 41 per cent for 2016.

This was, the report says, “a real indication that, while the sector is still growing, competition continues to be tight and a greater proportion of the market share is being taken by a smaller number of firms”.

The findings also suggest that “even firms who are growing their top line are finding it hard to translate that growth into bottom line profitability”. Price competition, rising personnel costs, and office prices appeared to be the main reasons.

The mid-market, however, has been better at reducing lock-up, with lock-up days falling from 147 in 2015 to 122 last year. Work-in-progress days have come down 69 to 68, but the biggest change is in debtor days, which have gone from 78 to 54, or nearly 50 per cent less that at City firms.

“Good working capital practices can make all the difference between success and failure,” the report said. “Of the high-profile firm collapses in recent years, it is always cash, not reported profits, that has been the primary driver.”

This prompted the report’s authors to encourage mid-size firms to do more to reduce the number of WIP days. “It is disappointing to see that regional firms still trail behind City firms with WIP days. Working capital management is not just about chasing debt; good billing practices also make a big difference in minimising credit risk and boosting cash flow.”

Unlike their City counterparts, lawyers in regional firms were less concerned about the impact of Brexit on their practices. One in four hadn’t made any assessment about how withdrawal from the EU would affect them, compared with 4 per cent in the City.

Of much greater concern were the difficulties in recruiting and training skilled staff and the emergence of alternative legal services providers, such as accountants. More than half of regional firms (52 per cent) felt new entrants posed the greatest threat, compared with more than two-thirds (68 per cent) of City respondents.

By contrast, so-called supermarket firms and Tesco law, which were seen as a major threat when the Legal Services Act was going through parliament, are no longer feared. Only 5 per cent of City firms and 13 per cent of regional firms said these presented a threat to their market share.

Jean-Yves Gilg, editor-in-chief

jean-yves.gilg@solicitorsjournal.co.uk | @jeanyvesgilg

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