Time to put all that money to work

Joanne Harris, news editor

It’s the middle of US law firm reporting season and the giants of the legal world are confirming their 2015 financial results. While a lot of firms had a good year in terms of workflow, flattish revenue rises are a recurring theme for many of the bigger players.

Latham & Watkins, the world’s biggest firm by revenue: up 1.5 per cent. Weil Gotshal & Manges: flat. White & Case: up 1 per cent. Davis Polk & Wardwell: flat. Only Dentons, through dint of adding thousands of lawyers to its headcount, has seen a transformative change of 66 per cent to enter the $2bn club.

One possible reason for the lack of turnover increase is firms’ failure to collect what they have earned. Davis Polk managing partner Tom Reid says the firm’s stagnant results were partly due to not collecting in all its bills.

So this week’s cover feature, which looks at cash in UK firms, is timely. Taking as a snapshot the end of the 2014/15 financial year, our analysis shows that net cash in the top 50 UK firms rose by a whopping 159 per cent last year. The 44 firms analysed – all those which have filed LLP accounts at Companies House – collectively held £1.04bn cash in the bank at year-end, a figure just shy of White & Case’s 2015 global turnover.

When we quizzed finance directors, bankers and consultants about the reasons for this increase a number of theories were put forward. But the most likely reason seems to be that UK firms just got better at cash collection and realising work-in-progress.

Our previous analysis of data collected for the UK 200 2015 already suggested this, but the LLP data provides more solid proof that a focus on improving financial management is paying dividends for firms. Although money is cheap and overall bank borrowings for the group rose slightly, the top 50 decreased their reliance on overdrafts and several made some quite sizeable investments using cash.

But if UK firms are to truly combat the rise of competitors, both from overseas and the likes of the big accountancy firms, there is a strong argument that collectively there is a need to use that pile of cash to invest – in technology, in people, and in the future.

The market is healthy for the moment, but the start of 2016 has brought the threat of Brexit and financial market uncertainty. Small-c conservatism might not cut it in the future. It could be time for firms to start spending.