Prudent approach to cash management wins support as firms delay profit payments. Pui-Guan Man reports

The majority of partners see moves by firms to hold back profit payouts as sensible financial management, as new Legal Week research highlights the widespread use of such measures across the profession.

The latest Big Question survey found that 45% of respondents have seen regular profit distributions delayed or withheld at their firm over the past 12 months, including 10% whose firms have held back 'all or several' payments in that timeframe. The remaining 55% said all distributions at their firms had been paid out in full and on time.

Top UK law firms to have held back partner payouts in recent months include SJ Berwin, which held back its February profit distribution, as well as Ashurst, Field Fisher Waterhouse and SNR Denton.

Meanwhile, Berwin Leighton Paisner has this year delayed its annual bonus payments to senior equity partners owing to unsettled market conditions.

The bulk of respondents to the survey described such moves as 'prudent financial management', with 42% saying it 'makes complete sense', while a further 41% believed such moves made sense for certain firms. But 15% said withholding payments could suggest significant underlying problems for a firm.

More than 50% said they expect all or most large law firms would be holding back some partner profit payouts, contrasting with 44% who believe that just 'a few' would be taking such action. 

DAC Beachcroft senior partner Simon Hodson said: "Retaining quarterly partner payouts is perfectly sound and a traditional way of dealing with working capital needs.

"But there is a wider issue here – as more firms are becoming more attuned to their balance sheets, it will be interesting to see whether some firms turn to new opportunities to bring in capital, such as alternative business structures. 

"We could be seeing a brave new world where firms are considering whether they want provision of capital to come from a non-lawyer co-owner instead of just navigating external borrowings and delaying distributions."

Fifty-eight percent of respondents thought holding back partner payouts should be the first course of action for firms looking to address cash flow issues, with just 8% arguing that partners should be required to put in more capital and 8% believing firms should take out loans to meet short-term capital needs. 

The remaining 27% of respondents stated that firms should not be forced to resort to such methods, claiming that firms should never reach the point where profit payouts cannot be made on time.

Tony Williams, principal at legal consultancy Jomati and former Clifford Chance managing partner, said: "Given the amount of fixed overhead costs that law firms have to pay, it is understandable that firms wouldn't opt to go to the bank to ask for more facilities just to pay their partners.

"Housekeeping by holding back partner profit payments, especially as better working capital management is often achievable by the partners, would absolutely be the sensible thing to do rather than use up facilities and rainy-day money. 

"Outgoing costs will always have a high degree of continuity and predictability, but incomings, such as workflow, billings and collections, can be much more sporadic. Maintaining cash flow by withholding quarterly payments reduces surprises for both the partners and the banks."

Respondents were divided over the number of times a firm could hold back quarterly profit payouts without prompting wider concerns about its financial health. Forty-three percent thought 'a couple' of withheld payments would be the limit, followed by 29% who argued that just one payout could be held back without raising uncertainty. 

On the other hand, 15% believed a firm could withhold an entire year's worth of payouts or more without impacting on the perception of its stability. The remaining 12% disagreed, saying that any indication of late profit distributions would immediately raise concerns.

Allen & Overy managing partner Wim Dejonghe added: "We've had a fixed timetable in place for years that we haven't changed. We take a very conservative approach to our financial management that is focused on providing stability and predictability, which means we haven't had to hold back distributions.

"Despite the tough market, we believe our conservative approach will ensure we can stick to our usual timetable."

Partners on quarterly profit distributions

45% say profit payouts have been delayed/withheld at their firm in the past 12 months
53% believe all or most large law firms are holding back some partner profit payments
42% think holding back partner profit payouts makes complete sense
28% believe law firms should be run more like businesses