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Australia’s small and mid-tier firms must make business development a priority in 2012, according to a new benchmarking report.
Australia’s small and mid-tier firms must make business development a priority in 2012, according to a new benchmarking report.
According to research conducted by Crowe Horwath, in partnership with the Australian Legal Practice Management Association, small and mid-tier firms must now focus on business development to capitalise on the capacity they created in 2011 and to free up cash flow.
Crowe Horwath’s second benchmarking report assessed Australian law firms with respect to their profitability, working capital, return on capital and growth outlook, and found that while the country’s small and mid-tier firms spent 2011 gearing for growth, they struggled to maintain profitability.
According to the report, gross profit for Australian law firms declined by approximately 5 per cent year on year. This drop, however, was partly caused by higher levels of long-term capital investment by legal practices around the country.
“We saw many firms investing profits back in their businesses last year, creating opportunities for business growth heading into 2012,” said Andrew Chen, Crowe Horwath’s business advisory principal.
“This includes many firms investing heavily in new practice management systems, premises and additional non-fee earner employees.”
Having invested heavily in capital last year, Australian law firms must now place business development at the top of their priority list for 2012.
According to Crowe Horwath, bringing in new work will free up cash flow, which is under pressure for many practices as a result of their lower profitability.
“From our research and our clients’ experience in the domestic legal services market, we predict that 2012 will continue the trend of less work to tender for, and more competition to secure it,” said Chen. “Under these conditions, a solid business development strategy is vital.”
This increase in competition and lower profitability in 2011 has also put significant pressure on the cash flow of Australian law firms, with average partner drawings now much less than in previous years.
“If the cash flow crisis continues, practices will begin to run into serious operational challenges,” said Chen. “For example, in our conversations with banks and other lenders, we can see they are becoming much more meticulous about the cash flow condition of legal practices when it comes to funding.”
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