Law firms have increasingly large amounts of unpaid bills sitting on their balance sheets, which is hurting their cash position, according to an analysis of their limited liability partnership (LLP) accounts.

Research by Legal Week, in conjunction with Smith & Williamson, found that the top 50 LLPs, which does not include Slaughter and May, had £5.6 billion due from clients at the end of the last financial year.

The figure has been increasing annually despite dwindling cash reserves at law firms. This year's figure marks a 9% increase on the 2016-17 figure of £5.19 billion.

Click on the table to see the full client billing analysis

Allen & Overy had the highest value of unpaid client bills, with £538.5 million due to the firm. Browne Jacobson had the lowest at £19.3 million.

CMS, meanwhile, marked the highest percentage change year on year, measuring a 91% increase in unpaid bills to £186.3 million, up from £97.5 million, after its three-way merger went live in September 2017. Revenues for the firm's U.K. LLP were £521.9 million following the merger, up 88% from CMS Cameron McKenna's 2016-17 revenues of £277.5 million.

According to the data, which was compiled by accountancy firm Smith & Williamson, the top 50 firms collected £17.3 billion in fees during the financial year 2017-18, meaning that unpaid invoices amounted to almost a third of their total combined revenue.

U.K. firms have traditionally been slower to chase payments than U.S. firms operating in the City, with clients taking on average 121 days to pay U.K. top 50 firms last year.

Travers Smith has been paid had its bills paid the fastest for the last three years, with an average turnaround time of 73 days last year. That figure is increasing steadily, however – it is up from 61 days in 2015-16.

Travers senior partner Chris Hale said: "We do focus on trying to get our bills out as quickly as possible and once they're out, getting them paid. Why ours would be paid faster than others is difficult to explain, but quite a significant number of bills will be paid when they are issued because they are part of the transaction. What that means is that [the bill] will be paid either on completion or a day or two after completion."

Irwin Mitchell clients took the longest to pay the firm last year, taking on average 268.8 days to do so. The firm has had the longest wait time for payment out of the top 50 for the past three years.

A spokesperson for Irwin Mitchell said in a statement: "The time it takes a law firm to get paid depends on the type and mix of work it does. We undertake a considerable amount of commercial work through our business legal services division, however our average payment day figure is influenced significantly by the use of conditional fee agreements and unbilled disbursements on large, complex, personal injury cases.

"We agree to manage these disbursements during these often lengthy cases and then receive payment when they are finalised and settled. If these unbilled disbursements aren't included, the payment day figure falls considerably and in fact it compares favourably with published accounts in the previous year."

Combined, the top 50 firms had £1.325 billion in cash on their balance sheets at the year-end, alongside bank loans and overdrafts totalling £875 million, leaving them with about £450 million in net cash.

However, monthly staff costs came in at £610 million, meaning that firms are relatively thinly capitalised and vulnerable to volatile market conditions – something that faster client bill payments could help to offset.

Nick Randall, associate director at Smith & Williamson, said: "Law firms are and have always been notoriously bad at their lock-up cycle, which is fairly obvious as seen by measuring the balance sheet against the turnover at these firms.

"If clients were to stop paying the law firms for a couple of weeks or a month because there were shocks to the economy, and because firms may hold onto their cash and not pay suppliers, some of these law firms could face significant cashflow problems because it's all wrapped up in things that clients could withhold, so they wouldn't have enough cash to pay their wage bill at the end of the month."

In a videoed interview with Legal Week, Smith & Williamson head of professional services Giles Murphy said: "I think from a position of protecting the firm and making it resilient, the best scenario is to have assets in the form of cash. The debtors are convertible into cash at a period in time, but I think the concern is that is a significant sum of money that is still outstanding.

"If you were to contrast that with perhaps other professional services, or even other just services industries, how many of them would allow a third of their annual revenue to still be due from their clients and customers at the year-end? I think you would say that the legal market is at the extreme, and it's the wrong end of that extreme."

Murphy added that based on the numbers his firm had seen, if firms were able to reduce their outstanding bills by just 10% by the year-end, that would more than double their net cash positions.

"Being realistic, we're not suggesting that they're suddenly going to change their historic practices, but fairly minor changes can have a significant impact… It's all about ensuring that the gap between when they do the work and when the client pays gets minimised."

To view the full analysis of the top 50′s unpaid bills, click here.