Distinguishing cyclical trends from immediate threats
Financial planning is critical, but not every development in the legal market, and the economy as a whole, merits a response from law firms, says Mike Stevenson, managing director at Iceberg.
The Bank of England is predicting a further increase in energy prices and, as it continues to try and get a grip of inflation, is soon expected to make the sharpest rise in interest rates in thirty years. When it comes to planning, it is such immediate and near-term concerns that can often dominate our thinking – but law firms cannot simply be concerned about the present, they must take the big picture into consideration.
Let’s look at a recent example – after months of concern over the UK economy, with many predicting an unhindered slide towards recession, the news that GDP rose by 0.5% in May caught most economists off guard. Lurking underneath that positive data though was the news that turnover for the legal services had fallen by 16%, from April’s £3.92 billion to £3.28 billion the following month.
At first glance this is would appear to be a deeply worrying contraction and cause for alarm, but digging deeper into the data shows a different story. In May 2021, the sector recorded a turnover of £2.93 billion, down from £3.74 billion in April 2021 – a fall of 22%. When considering the 2022 figures, it appears that rather than an alarming fall the data points to a cyclical trend tied to the end of financial years.
Viewed together and put into context, May’s decline in turnover and GDP rise show a markedly contrasting situation to what initially appeared to be the case – a healthy legal sector and an economy with warning signs still flashing overhead.
The UK economy still faces the same challenges it was facing in March and April, and one good month of economic activity does not itself tell you much about its overall health. It will take two or three more months until we can assess whether the slide to recession has been stopped.
The same is true of the legal sector. May’s figures were a shocking snapshot, but it was only a snapshot. By looking at the bigger picture we can see the long-term trend and place those figures in context. Legal firms looking to plan for their financial futures need to consider the big picture. Posting positive and profitable half-year results does not mean that cash flows will remain evenly spread across the rest of the year.
Healthy law firms, like the economy itself, will fluctuate. As May’s turnover figure shows, there will be months when sensible, planned financing can allow operations to continue smoothly and without concern – and it is not too early to start considering plans for May 2023.
That the economy can change rapidly, and that unforeseeable events such as Covid can alter the entire landscape, is a fact of life – but planning remains as vital as ever. For those firms currently planning their future finances, remember to look at the big picture. Understand which events are cyclical and ensure you have the right support in place so that when major shocks do hit the economy that you are still able to access the financing necessary to continue business as usual.
