Managing lock up: Part two

Mark Lloydbottom explains how firms can reduce their lock up and improve profitability.

My previous article concluded by asking you to identify your firm’s lock up percentage to gross fees. I also referred to a benchmark of 32% lock up that I established back in 1982, but since then the commercial landscape has dramatically changed and it is time to introduce an updated benchmark.

If you have noted the correlation between your lock up and owner capital, you might like to answer these questions:

1. How would you feel if your lock up was 20%?
2. What would your bank balance look like? How much of your capital could you withdraw?

There is a further issue to consider and that is your exit (or that of others) from the firm. With many firms unable to access increased working capital funding, this is going to have a knock on effect when retiring partners need their capital accounts repaid and any goodwill payments funded. Now is the time for the accounting profession to address and resolve this issue – local authorities and utility companies have changed their payment procedures; if they can do it, so can others.

The key to getting started is attitude and commitment - but first, let me address one key which provides a compelling reason to change. Almost everything we pay for has a known upfront cost; we are all used to acquiring goods or services with the cost being known in advance. So, here is a very simple proposition - agree the fee and payment plan with the client in advance. Low inflation and the recession have resulted in fees remaining relatively static and so for the core work why not agree a fee? In reality the fee is already known by the client based on most people’s assumption that this year’s fee will bear some resemblance to the previous year.

My proposition is that 28 years after I first developed my approach to lock up benchmarking much has changed. I am convinced that accountants need to grasp this issue – if we don’t now then nothing will change.

Continued...