Question:
I am the firm administrator for an eight attorney firm in Nashville, Tennessee. I started this position approximately six weeks ago. While I have worked in the legal field for many years as a paralegal, this is my first position as a legal administrator. I have done bookkeeping for several firms over the years. The firm has never had a budget and has asked me to prepare one for the upcoming year. I am not sure where or how to start. Any help or ideas that you may have would be appreciated.
Response:
You will want to consider two budgets. The first will be an operating budget which is a revenue and expense budget that will contain the income and expense accounts that are listed in a profit and loss or income statement. The second will be a capital budget which will be a budget for capital expenditures that are typically listed as assets on a balance sheet such as furniture and equipment.
Here is a process that you might want to use.
Operating Budget
Capital Budget
This is often just a simple list in a spreadsheet and manually tracked. Many of the general ledger systems only allow budgets for income and expense accounts.
Good luck with your project.
Click here for our financial management topic blog
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC
Question:
I am the newly elected managing partner in our twelve-attorney firm in Chicago, Illinois. Our firm is a business transaction firm that was started by the present four partners ten years ago. While we have an office manager that does the bookkeeping, prior to this year all four partners as a group managed the firm. This year the firm decided to create the managing partner position. Since this is new to me I am trying to learn all that I can about law firm management. My first priority is to help the firm improve profitability and I would like to know what the key operating metrics and statistics are that I should be monitoring. You suggestions will be appreciated.
Response:
Law firm operating statistics represent an important management tool. They highlight superior performances and they flag below average performances. They provide law firm management with the key information needed to manage the firm’s business. In addition to measures such as firm fee revenue collections, firm profit/net income, profit per equity owner, billable hours, fee revenue collected per attorney, operating statistics found in law firm management reports typically include information on:
The first three statistics represent factors that relate to earning the firm’s revenue. Responsibility for earning the firm’s revenue rests with the firm’s partners. Consequently, it is important to assign this responsibility to specific partners – typically the responsible/billing attorney.
In recognition of the assigned responsible attorney concept, many firms choose to present revenue-related operating statistics reports in a format that focuses on each partner’s responsibility. This gives the management group the ability to access each partner’s “business” performance.
Click here for our financial management topic blog
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC
Question:
Our firm is a sixteen attorney municipal law firm in Detroit with six partners and ten associates. Like most firms that do municipal work we must deal with lower billing rates than other firms charge. The volume of our work can also fluctuate at times. All of our work is billed by the hour and billable hours is our most important key performance indicator. Our associates have a billable hour expectation of 1800 annual billable hours and only two of our associates are even close to reaching 1800 hours. Some are not even reaching 1200 hours. Some of the associates have the excuse that they don’t have enough work. We do not believe that this is the case. I would like to hear your thoughts on this matter.
Response:
This seems to be a common issue. Failure to attain billable hour goals can be caused by any one or a combination of the following:
I would start by observing the number of worked hours they are putting in. Are the putting in the hours? Observe as well as review their time reports – billable and non-billable time. If you don’t track non-billable time start doing so. Then review and discuss with them their time management and time keeping/recording habits. Questions to ask include:
Review and discuss workload levels of each associate and determine if lack of work is an issue.
I have found that often the cause of the problem is a combination of some or all four of the above listed causes. Lack of work is often one of the causes. My question is then:
The firm should have an established protocol for assignment of work to associates and to whom the associate advises that he or she needs more work. When billable work is slow and not available the associate should be assigned non-billable firm or business development projects such as developing document templates, writing articles, etc.
If the problem is work ethic appropriate consequences and disciplinary measures may be required.
If the problem is time management and time keeping training and habit building will be required.
Click here for our financial management topic blog
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC
Question:
I am the owner of a three attorney personal injury practice in Columbia, South Carolina and I am contemplating retiring in seven years. I have an associate on board that I would like to sell my practice over the seven years. How do I go about valuing my practice and determining how much I should ask for?
Response:
A few of the various methods used solely or in combination with other methods for valuing a law firm include:
Personal injury firms are difficult to value due to the variability in cash flows that are often the case with many firms. Some personal injury firms have relatively predictable cash flows and others have very large swings. When this is the case the typical solution is cash-based book value plus a percentage of case fees as they are concluded with a percentage of completion factor applied.
Click here for our blog on practice sale
Click here for our blog on succession
Click here for out articles on various management topics
John W. Olmstead, MBA, Ph.D, CMC
Question:
Our firm is a eighteen attorney firm in Portland, Oregon and I am the recently hired firm administrator. This is my first law firm. My previous employment was with a small manufacturing and distribution company. I have read some articles that discussed the importance of managing inventory in a law practice. Does a law firm even have inventory? I would appreciate your comments.
Response:
Inventory (or pipeline) management is a term used in the management consulting profession to refer to the process by which you continually evaluate your active opportunities (prospective clients to booked clients) for their balance of QUALITY and QUANTITY. The goal is to continually stay on top of the overall health which is a full pipeline. Pipeline management allows client relationship managers to more accurately forecast fee revenues, better staff and manage client engagements, and close more client business.
I often also refer to Inventory or Pipeline Management in law firms in the context of using financial dashboards by which the individual charged with financial management responsibilities is continuously aware of significant changes in the firm’s Inventory or Pipeline (from prospects to cash):
By comparing these dashboard statistics to a prior month, quarter, or year – you are able to avoid financial surprises down the road.
Law firms do have inventory and that is their unbilled work in process (matters in process) or in the case of a contingency fee firm I usually refer to work in process as cases in process.
How well this inventory is managed – managing what is in front of you rather than what is behind you is a critical component of financial management and has a major impact upon the profitability of the firm. However, this responsibility falls primarily to the attorneys responsible for the matters. However, in your capacity as administrator you can provide the reports and oversight to help keep them on course.
Click here for our financial management topic blog
Click here for our law firm profit improvement blog
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC
Question:
I am a partner is a small family law firm in Tucson, Arizona. There are two partners in the firm and two associates. We have an office manager/bookkeeper, a receptionist, and two legal assistants. The office manager was hired one year ago. The other partner is retiring next year and I am purchasing the practice from him. I became a partner last year. I am new to the management side of the practice and have been relying on the office manager who also serves as our bookkeeper. I am at my wits ends with our office manager and I believe that she is not suited for the position. She has no organizational skills, she misses deadlines, vendor bills are not paid on time, and client bills are not sent out accurately and timely. I have counselled her on numerous occasions to no avail. I believe we need to replace her but I am reluctant since no one else here knows what she does or how she does it. A new billing and accounting system was implemented last year and she was the only one trained on the system. What do we do if we terminate her or she quits? We are hostages. I would appreciate any ideas of thoughts that you may have.
Response:
I understand and appreciate your situation. It sounds like you have not documented your procedures in the form of a firm procedures manual and everything is in the office manager’s head. This makes it difficult for someone to take over her responsibilities if she leaves the firm for whatever reason but not impossible. It will probably be difficult to get her to develop one now as it may signal to her that her time with the firm is short and she may start looking for another position. You may have to just bit the bullet, terminate her, restaff the position, and go from there. It won’t be fun but you will make it though. You might consider the following:
After you get the position staffed and past the crisis develop a detailed written manual of procedures for the office. Not just the office management side but the client service side – attorneys and paralegals as well.
I believe that it is imperative that owners and partners in a law firm have access to financial information on a timely basis, understand the information, and use the information in a proactive way to manage the practice. I suggest:
Click here for a bookkeeper listing of duties.
Click here for our financial management topic blog
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC
Question:
Our firm is a four attorney personal injury plaintiff law firm with three partners and two associates located in upstate New York. Could you advise us as to what the expected cost range per year is for an attorney to practice? Assume the attorney generates gross revenue of $500,00 per year. What should he/she expect to earn as gross income based on that revenue?
Response:
Depends on the type of practice, whether the firm does extensive advertising, etc. In general, the average range of margins are running from 35%-45%. In other words the partnership pie – profits available to partners whether in the form of W2 salary or net income. If a partner were practicing alone with minimal overhead and maximizing the use of technology the margin could be better. In general a lawyer generating $500,000 in revenue in a firm such as yours with typical overhead -hopefully 35% – 45% margin – $175,000 – $225,000. I have worked with some firm such as foreclosure law firms where the margins are 15% margin and some high volume advertising PI plaintiff firms at 20% margins.
Click here for our financial management topic blog
Click here for our law firm profit improvement blog
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC
Question:
I am the owner of an estate planning firm in Milwaukee, Wisconsin. I have five associates and four paralegals working in the firm. More of my time is spent on managing the practice and marketing than on servicing clients. I am trying to develop financial goals for the firm but I am clueless as to what financial indicators or ratios I should be looking at and what constitutes good or bad performance. Anything that you are willing to share would be appreciated.
Response:
Here are what I believe to be key financial indicators/ratios and performance for a firm of your size and type:
I like to see profit margin – owner compensation – salary if paid as w-2 wages plus profit in the range of 35% – 45%.
Performance can vary by type of practice.
Click here for our financial management topic blog
Click here for our law firm profit improvement blog
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC
Question:
I am a partner with a sixteen-attorney firm in downstate Illinois and a member on our three person management committee. My responsibility on the committee in overseeing the firm’s finances and supervision of the firm administrator pertaining to accounting and finance. In reviewing our financial reports I have noted that our effective billing rates (realization rates) are not what they should be. We are reluctant to raise rates to our clients. What other steps can we take to improve our effective rates?
Response:
The most direct way to improve rate performance is to simply increase rates at an amount at least equal to inflation and to do so often (at least once a year). Without regard to whether this can be done, there are several other important techniques such as:
Managing the client intake processes is probably the most important technique for improving rate performance. Intake management means:
Here are some ways to accomplish this:
Click here for our financial management topic blog
Click here for our law firm profit improvement blog
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC
Question:
Our firm is a six attorney insurance defense firm in Kansas City. For the last few years our associate attorney costs have gotten out of control and in some cases revenues generated by particular attorneys are not even close to where they should be considering their costs. We have one associate attorney that we are paying a base salary that only does appellate brief work. He does not like litigation and does a poor job doing our bread and butter litigation work. We simply don’t have enough appeals to keep him busy. We are paying him a base salary of $100,000 a year. Last year his working attorney fees collected were $110,000. I welcome your thoughts.
Response:
Obviously, you are losing money on him. An associate being paid $100,000 per year should be generating $300,000+ if you are looking to make any margin from him. Overall you should be making 25%-30% profit from your associates. Margin from associates is critical in an insurance defense firm. You are not even covering his direct cost alone any indirect overhead cost.
I believe you cannot justify this position and should consider eliminating this position and outsourcing your appellate work . Many insurance defense and other litigation firms that I work with are outsourcing appellate work to other law firms that provide this service for other law firms. There are also solo practitioners and freelance attorneys with appellate expertise that are working as contract lawyers for law firms doing appellate work. Another option is a legal process outsourcing firm.
It is imperative that you conduct proper due diligence and really check out the background, experience, and appellate track record of the firm or individual attorney that you are considering. Your short list should only include firms or attorneys that have a proven track record of appellate wins. Talk with some other law firms that are doing this.
Click here for our financial management topic blog
Click here for our law firm profit improvement blog
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC