Scottish legal practices used up most of their cash reserves last year after average profits per partner fell back to 2010 levels.
The Law Society of Scotland says solicitors are facing “tough” trading conditions, with medium-sized firms appearing to have been worst hit.
It said the effects of the recession are far from over, and cash flow issues were proving to be a particular problem across the board.
Research showed a drop in law firms’ bank balances in the past year from more than £200,000 to some £50,000, for those with ten or more partners. Firms with just two to four partners saw their median bank balance fall from £27,000 to £6,000.
Management consultant Andrew Otterburn, co-author of the report, said that solicitors can take steps to improve their firm’s outlook.
He said: “There has to be a real focus on cash flow and maintaining a healthy bank balance.
“Understandably, the priority for most solicitors is attending to the needs of their clients, but they also need to ensure that their own business is operating effectively.”
Median profits for equity partners in Scottish law firms have dropped to £64,000, the same level as two years ago, following an increase in 2011. Partners in medium-sized firms have seen the biggest drop, while sole practitioners and larger firms have seen a rise in their per partner profits.
The results illustrate the extent of the difference between the profitability of larger firms – with 10 or more equity sharing partners – and smaller firms, with larger firms’ average profit per equity partner exceeding those at smaller firms by £79,000.
The apparent paper profit is not the same as actual earnings, as the money is also used for working capital.
Lorna Jack, chief executive of the Law Society of Scotland, said: “The survey is a good indicator of the general health of the profession on an annual basis and it’s clear that the effects of the recession are not over.”
She said new legislation which will allow more competition in the field will “undoubtedly” lead to more consolidation.
The survey echoes figures from accountant PwC, which last week reported shrinking income among the Scotland’s largest law firms, which appeared to be underperforming their peers south of the Border.
It also comes after DLA Piper announced it is closing its Glasgow office with the loss of 45 legal sector jobs.
The company, which has operated in the city for more than 12 years, plans to shut the branch on or before the end of its financial year on 30 April, as part of a wider UK restructuring plan.
Ten directors from Glasgow will transfer to the firm’s Edinburgh site along with 30 staff.
The firm also confirmed it is in advanced discussions with two separate organisations which are looking to take over its defendant insurance practice.