Law Practice Management Asked and Answered Blog

Category: Financial Management

« Earlier | Later »

Mar 29, 2017

Improving Law Firm Profitability

Question: 

I am the managing partner of a six lawyer general practice firm in Chicago. We have four partners and two associates and have been in practice for twenty years. While we are holding our own and doing okay financially we would like to do better. The partners have never earned more than $175,000 – some years not even that. What can we do to improve profitability?

Response: 

Profitability can be increased by increasing revenue, decreasing expense, or increasing leverage – ratio of associates to partners. Most law firms do not have an expense problem – they have a revenue problem. Profitability improvement programs tend to be more successful when they concentrate on improving profits through increased revenue versus programs than focus on reducing expenses. A program that focuses on increasing revenue such as increasing billable hours, raising billing rates, and improving realization rates will yield better results. Programs that focus on expense reduction often do not yield satisfactory results in the long-term.

Improvement in leverage usually can only be achieved as part of a long-term program. Sudden sizeable increased in the number of associates may prove to be counterproductive if there is not sufficient client work to keep associates busy. Another option would be to reduce the number of partners  through retirement and other options must be carefully planned and I am sure is not an option that your firm is looking for.

I suggest that you review your expenses to insure that they are in line and if they are not make reductions that make sense. Then focus on the revenue side of the equation. Review your client base, practice areas, billing rates, flat fee rates, billable hours being worked by your partners and associates, and realization rates. Then identify problem areas and chart out a course of action.

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

 

Nov 29, 2016

Law Firm Retainer Management – Replenishment

Question:

Our firm is a five attorney estate planning/administration practice located in Kansas City. Our estate planning work is handled on a flat fee basis for our clients. We collect one half of the fee upon acceptance of the signed engagement letter and the other half upon signing of the estate planning documents. This has worked well for us. However, we are not doing so well with our estate administration work. This work is time billed against a retainer. We do a good job collecting the initial retainer but then we fail to ask for replenishment retainers and when we bill for the remaining work we have collections problems. We have are over six hundred and fifty thousand dollar in accounts receivable over 120 days old. We would appreciate your thoughts.

Response:

This is a common problem that I see in estate planning/administration and family law practices. Here are a few suggestions:

  1. Assign someone in the firm to review a Summary Work In Process Report or similar report that shows the dollar value of unbilled work in process and the dollar value of used retainer at least once a week. (Some firms do this daily)
  2. Flag matters that are at 90% of retainer (unbilled work value to unused retainer) and bill clients for retainer replenishment in accordance with firm policy.
  3. Advise responsible/billing attorney of the retainer status, that a bill has been sent for replenishment, and again when the payment of the additional has been received.
  4. Responsible/billing attorney should consider the retainer balance status when scheduling work on specific matters that have reached 90% of retainer balance.
  5. Send retainer replenishment bills as frequent as necessary. It is easier for clients to pay small bills than very large bills.
  6. Stay on top of your receivables – smile and dial (call) after bills have been outstanding for thirty days. Reminder bills and statements are a waste of time.
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

 

Nov 22, 2016

Law Firm Billable Hours – Attorneys Not Meeting Expectations

Question:

I am a partner with a fourteen attorney business litigation defense firm in Los Angeles. I am the member on our three member executive committee that is responsible for financial oversight. This year we put in place an 1800 annual (150 hours per month) billable hour expectation for associate attorneys. No one has ever reached 150 hours. Are our expectations unrealistic? What is our problem? I would appreciate your thoughts.

Response:

I do not think that a 1800 annual billable hour expectation is unrealistic. Litigation defense firms typically have an expectation of 1800 to 2000 annual billable hours. Many litigation defense firms that I am currently working with have a 2000 billable hour expectation with many attorneys working 2200 billable hours.

Typical causes for an attorney not meeting expectations are:

  1. Not working or putting in enough hours.
  2. Not enough work.
  3. Poor time management habits.
  4. Poor timekeeping habits.

I suggest that you meet with each associate and discuss each of these possible causes.

Since this seems to be an across the board problem I suspect that the firm may not have enough work to support these billable hour expectations. Many of our clients are having this problem. They are hiring more attorneys that they actually need, have overcapacity, and simply don’t have the work to support billable hour expectations.

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

 

Oct 11, 2016

Law Firm Management – Valuing a Personal Injury Practice

Question:

I am the firm administrator for a small personal injury five attorney practice in Des Moines, Iowa. The firm's owner is approaching retirement and is planning on approaching other law firms regarding sale of the practice or merger. He has asked me for reports in order that we can value the practice. QuickBooks is the only software that we use. What reports should I use to establish a value for the practice?

Response:

You will want to start by generating a profit and loss statement and a balance sheet from your software. I would run five years of profit and loss statements and the most recent balance sheet. The profit and loss statements will help you illustrate the revenue, expenses, and profit picture for the past five years. The balance sheet will provide a current financial snapshot of the firm's cash-based financial position. However, since most law firms keep their books on a cash-based basis the largest asset – contingency fee cases in progress – is not reflected on the balance sheet. Neither is any value for practice goodwill. Since you do not have a case management system you will have to setup a spreadsheet with columns for the name of the case, date opened, estimated settlement, estimated fee, client costs/advances, and projected date of receipt of fee. You will have to have the attorneys managing the cases help you with the estimates. These will be the key reports you will need initially.

Click here for our blog on succession

Click here for out articles on various management topics

John W. Olmstead, MBA, Ph.D, CMC

Sep 07, 2016

Law Firm Profitability – How Do I Know if We Have Enough Work for the Attorneys?

Question:

I am the owner of an eight attorney estate planning firm in Jacksonville, Florida. Our firm handles estate planning and estate administration. For this entire year our financial numbers are way down and I am getting concerned. For example, compared to last year:

I would appreciate any ideas on what I should do next.
 
Response:
 
Several of my estate planning/administration firms from different areas of the country are advising me that business is way down this year and they can't put their finger on the problem other than demand and timing.
 
I would start by:
 
  1. Take a look an your new matter intakes for the year – month by month.
  2. Examine the referral and marketing sources as to where this business is coming from.
  3. Prepare a open matter inventory report by attorney and matter type to get a count of the number of matters each attorney is handling
  4. Examine billable hours, non-billable hours, collected working attorney fees and realization rates for each attorney.
Compare each of the metrics above with last year and prior years. Meet with all of the attorneys and review their matters in progress and discuss their workloads. Also review your marketing budget and marketing programs to see if changes are warranted.
 
This should give you a feel for what is going on. You could have problems in the following areas:
 
While you may find that you have problems in each of the above areas I suspect that your biggest problem is that attorneys do not have enough work and your business is down. If this is the case I would question how they are using their non-billable hours – are they doing more business development and marketing – or they simply pacing their time so they fill an eight hour day.
 
If your problem is lack of work you are going to have to see if additional marketing can generate the business needed to support the attorneys you have on board or reduce your attorney headcount.
 

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

 
 
 
 

 

Aug 17, 2016

Law Firm Financial Management – Monday Morning Report

Question:

I am the owner of a seven attorney firm in New York City. I have a bookkeeper that handles the accounting function. I receive monthly financial reports – but I believe I need a better tool to stay on top of my firm. I feel that I am lost, I don't want to take time to access different software modules such as our billing system, accounts payable system, general ledger system, etc. to get the information that I need to effectively manage the firm. We use Timeslips for billing and QuickBooks for bookkeeping. I would appreciate your thoughts.

Response:

I hear what you are saying. Most software program are good at giving you reams of paper in the form of reports but not so good at giving you the summary reports you need. Software companies are beginning to develop dashboards in their systems but the lower end systems do not give you what you need. You might consider tasking your bookkeeper with providing you with a Monday Morning Report (created in Excel) every Monday morning with the following summary information:

  1. Cash in bank balances for each account
  2. Bills due this week (vendors, payroll, taxes, draws)
  3. Anticipated payments from clients (new engagement retainers – flat fee and time bill)
  4. AR Balance
  5. Work in process balance
  6. Number of new retained matters for the month
  7. Total billable hours for each timekeeper (month and year to date)        
If after reviewing the Monday Morning Report you have questions ask for a more detailed report.
 

Click here for our financial management topic blog

Click here for articles on other topics

John W. Olmstead, MBA, Ph.D, CMC

 

Aug 09, 2016

Law Firm Financial Management – What Reports Should I Give To the Attorneys in My Firm

Question:

I am the firm administrator of a sixteen attorney firm in San Diego, California. We have six equity members, four non-equity members, and six associates. We also have four paralegals and six staff members. We are managed by a three member executive committee. Each month I provide the equity members and the executive committee with the same reports from our software system. They are quite numerous. The equity members and the executive committee complain that they get too many reports and they don't look at them while the non-equity members and the associate complain that they don't get access to any financial information. Do you have any suggestions?

Response:

Less is often more. I would rather see partners receive less reports and read and use the reports they do receive. They can always request additional detail reports if they desire them. Think of a pyramid – at the top are equity members, then non-equity members, associates and then the executive committee and the firm administrator. At the top of the pyramid the information is more summarized and more detail is provided as you work you way down the pyramid. For example, do the equity members need to see journal registers, cash receipts registers, etc.?

I suggest you develop a report distribution guide that outlines who gets what and when and have it approved by the executive committee. Here is an example:

The objective of these guidelines are to provide timely, meaningful reports to firm management, equity and non-equity members, associates, and other timekeepers. Therefore, as few reports as possible should be distributed to reduce bulk and information overload. All other reports not listed for equity member distribution should be available to them on a per request basis.

Daily Reports

 Weekly Reports

 A detailed time report will be generated weekly (by Wednesday of each week for the conclusion of the preceding week) and will be distributed as follows:

Monthly Reports

        Monthly reports should be distributed no later than the 5th of each month according to the         following schedule:

        Equity Members             

        Non-Equity Members

        Executive Committee

        Director of Administration

        Associates

        Paralegals

        Staff (Timekeepers Only)

Quarterly Reports

Annual Reports

Annual reports are generated at the end of the year and maintained in a end of year section of the reports binder for the year (or computer system)

        Equity Members

        Same reports as received monthly.

        Managing Member/Executive Committee

         Same reports as received monthly

        Director of Administration

        Same reports as received monthly

        Note: At year end each of the above reports should be printed and saved to a file to the         reports folder that has been setup on the computer network. This should be done prior to         running the year end close.

        Associates

        Same report as received monthly.

        Paralegals

        Same reports as received monthly.

        Staff (Timekeepers Only)

        Same reports as received monthly.

Click here for our financial management topic blog

Click here for articles on other topics

John W. Olmstead, MBA, Ph.D, CMC

 

Jul 13, 2016

Law Firm Financial Management – Realization Rates

Question:

Our firm is reviewing its partner compensation system and one of my partners suggested that we incorporate realization rates. This term was new to me. Is realization the percent that we collect? Your comments would be appreciated by all of us.

Response:

Not exactly. There are the following three general types of fee realization.

Overall Realization which is the relationship between the standard value of time (standard billing rate) and the actual fees collected. This is calculated by taking the value of unbilled time at the beginning of the year plus fee accounts receivable at the beginning of the year plus value of billable time worked during the year minus the value of unbilled time at the end of the year minus fee accounts receivable at the end of the year – equals potential fees to be collected. Realization (Actual fees collected/potential fees to be collected.)

Billing Realization which are actual fees billed/potential fees to be billed. This is calculated by taking the value of unbilled fees at the beginning of the year plus fees recorded during the year minus unbilled fees at the end of the year – equals potential fees to be billed. Billing realization is then calculated by dividing the actual fees billed by the potential fees to be billed.

Collection Realization which are actual fees collected/potential fees to be collected. This is calculated by taking the value of AR fees at the beginning of the year plus fees billing during the year minus AR fees at the end of the year. Collection realization is then calculated by dividing the actual fees collected by the potential fees to be collected.

All three calculations are important and tell different stories. They can be calculated at a firm level, client level, timekeeper level. Realization reports are available in the better law firm time and billing software programs.

Click here for our financial management topic blog

Click here for articles on other topics

John W. Olmstead, MBA, Ph.D, CMC

 

 

 

 

May 17, 2016

Law Firm Equity Partner Capital Contribution

Question:

I am the sole owner of a twenty-five attorney litigation boutique firm in Los Angeles. I am the only equity partner with nine non-equity partners and fifteen associates. I am concerned that if I don't provide a path to equity partnership some of my senior talent many gradually defect to other firms or split off to create their own law firms. I also believe that providing a path to equity partner for deserving non-equity partners is the right thing to do. Therefore, I am planning on admitting two non- equity members this year. Should I require capital contributions?

Response:

I believe that all new partners should be expected to contribute capital and have some "skin in the game." Whenever a firm admits a new partner, the firm should require the new partner to contribute capital. Increasingly, a partner's capital requirement should bear a relationship to the partner's share of profits. You may want to allow new partners a reasonable period of time to fund their capital accounts – say one or two years via a capital note or help them arrange favorable terms at your bank to finance their capital accounts. Usually capital accounts are tied to working capital needed to operate the firm and the percentage of ownership/income that each partner will have.

While capital contributions are all over the board ranging from zero to $100,000 in firm's your size I often see capital contributions ranging from $25,000 to $50,000. 

There are only three ways to increase a firm's working capital to cover cash flow requirements and fund growth:

1. Have partners put more money in
2. Have partners take less money out
3. Borrow

Click here for our blog on partnership

Click here for our blog on financial management

Click here for articles on other topics

John W. Olmstead, MBA, Ph.D, CMC

 

 

Apr 26, 2016

Law Firm Billable Hours in an Insurance Defense Firm

Question:

I am the managing partner of a 12 lawyer insurance defense firm in Oklahoma City. We have 4 partners and eight associates. While we have grown over the last five or six years by adding associates our profitability has remained flat. We feel that we are not getting the billable hours that we should out of our associates. What are other firms like ours getting out of their associates in terms of billable hours?

Response:

Most of my insurance defense firm clients expect a minimum of 1800+ annual billable hours from associates and partners. Often 1800 is a requirement to remain employed and the minimum threshold to be eligible for a performance bonus. Often I see billable hours at 2000 to 2200 in insurance defense firms.

This goal is getting harder to achieve. Insurance companies are now managing hours as well as rates and outlining their expectations in their billing requirements and guidelines. Law firms can no longer "lean on the pencil" like they used to do in the old days. In addition, if business and file assignments are down you can't expect associates to work on work that isn't there.

If you are not getting 1800 hours – the problem may not be associate work ethic – it may be that more time needs to be invested by the partners in focused business developed and bringing in more work.

Click here for our financial management topic blog

Click here for articles on other topics

John W. Olmstead, MBA, Ph.D, CMC

Archives

Categories

    Subscribe to our Blog