Boom no bust – avoiding complacency after a period of high revenues

The pandemic might have been lucrative for legal businesses, but inflation and the consequent squeeze on cash could catch them off guard – says Mike Stevenson, managing director at Iceberg.

Did you have a good pandemic? This may sound like a flippant question but new research suggests that for many in the sector it was a time of increased revenue and lower costs.

Conducted by Evelyn Partners, the research found that revenue for the top 50 law firms grew by 4.2% during 2020-2021, thanks to clients seeking advice on how to adapt to new regulations.  Alongside this revenue growth, the cost of doing business fell. With offices mothballed and travel expenses side-lined, technology and flexible working practices were enabling firms to meet the increased demand of clients.

These unique circumstances led to the overall revenue of those top 50 firms for the first time topping £20bn.

But these changes mask a series of challenges now facing the sector as a whole.

The Evelyn Partners research also found that while revenue rose so did pay roll costs – with an increase of 4.8%, and an expectation that the next pay round will push this higher as firms compete for staff. Investment plans that were put on hold during the pandemic are now being dusted down, but inflation is starting to bite and will start to erode the cash reserves acquired through revenue growth.

For small and medium size firms, inflation is also presenting a new array of challenges.As clients start to feel the pinch in their own cash flows, payments may be delayed with inevitable knock-on effects to those of their legal firms – which will also now be subject to the same pressures.

Firms that saw strong revenue levels during the pandemic may now find themselves in need of VAT finance support to avoid HMRC penalties, or to investigate flexible payment options for practice finance funding.