Law Practice Management Asked and Answered Blog
Category: Financial ManagementLater »
Dec 26, 2009
Q. These economic times have been challenging for our firm at best. A major problem for us is collecting our client receivables. Do you have any suggestions?
A. Regardless of whether economic times are good or bad cash flow is always a matter of prime concern for law firms. With it taking in general 3-4 months to convert client work to cash anything the firm can do to speed up the collection cycle is always desirable. Here are a few ideas:
- Do everything you can to keep receivables from going out to 90 days. Receivables aged one month are 93.2% collectable; three or more months are 72.3% collectable, and one year or more are 28.4% collectable.
- Call – don't waste time with mailing follow-up letters.
- Treat collection calls as an extension of client service. Calls should be treated as client service calls – not collection calls.
- Caller should be someone other than the attorney who did the work for the client, qualified staff member or outsourced Accounts Receivable Account Manager.
- Calls should be made by a trained Accounts Receivable Account Manager with client-friendly people skills.
- Calls should be made on each account as soon as it reaches the due date.
- Accept credit cards and offer it as a payment option.
- Discount bills when necessary if it will expedite payment and engineer payment plans.
- Diary, calendar, and follow-up.
- Consider outsourcing to an Accounts Receivable Account Manager – not a collection firm.
Consider our firm for outsourcing this effort.
John W. Olmstead, MBA, Ph.D, CMC
Nov 08, 2009
Question: What are some ideas that our eight attorney should be doing to improve profitability?
Use the RULES formula to focus your effort.
R = Realization rate or effective rate per hour.
U = Utilization – billable hours or case production hours.
L = Leverage – ratio of partners to other timekeepers.
E = Expenses – overhead.
S = Speed – collection cycle – converting work to bills and bills to cash.
Profitable law firms have an appropriate mix of each of these profitability levers. Compare against internal and external benchmarks and determine which of the levers require attention. Usually expenses is not the primary problem – in fact many firms should be spending more in the form of investment. Usually the primary focus should be on improving:
- Realization rate or effective rate per hour.
- Utilization – increased billable hours, client production hours or improved management of same.
- Leverage through increased use of associates, paralegals, staff and practice systems/technology.
- Speed/Collection Cycle.
Many firms need to increase case/matter volume through better client development and marketing to be able to obtain higher leverage ratios.
John W. Olmstead, MBA, Ph.D, CMC
Oct 02, 2009
I have recently read several law firm management articles that have referred to "Pipeline Management". What exactly does this mean and what is the implication for law firm management?
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 relatiionship managers to more accurately forecast fee revenues, better staff and manage client engagements, and close more client business.
I often also refer to Pipeline managment 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 Pipeline (from prospects to cash):
- Number of new business inquiries for the month
- Number of pending prospective clients
- Number of open client matters
- Dollar value of Unbilled Work in Process/Age
- Dollar value of Accounts Receivable/Age
- Dollar value of billings
- Dollar value of unearned retainers
- Dollar value of fee receipts/collections
By comparing these dashboad statistics to a prior month, quarter, or year – you are able to avoid financial surprises down the road.
John W. Olmstead, MBA, Ph.D, CMC
Sep 28, 2009
Question: Our firm, a seven attorney personal injury firm in the southwest, seems like we can never get to the next level financially. Do you find that excessive overhead (expense) is the major problem for law firms?
Not really. In fact, in many cases I find that law firms should be making larger investments in their future and spending more money. Often investments in marketing, talent, and technology are insufficent in many firms. The problem in most firms is insufficient leveraged fee revenue. In other words – many small firms practitioners – only think in terms of whether they have adequate work to keep themselves busy – they do not think in terms of being a net exporter of work so they can keep themselves busy plus two or three other attorneys and or paralegals. A well leveraged practice is what takes you financially to the next level. In reality – more marketing is needed – to create a sufficient volume of work to support this leverage. Once this is accomplished – attorneys must learn how to manage and supervise others – and the compensation system must shift emphasis from personal working collections to responsible (billing attorney) collections.
John W. Olmstead, MBA, Ph.D, CMC
Sep 01, 2009
I do a good job of collecting initial retainers before doing work for my family law and criminal clients. But then I fall behind on retainer replenishments. Do you have any thoughts or ideas?
This is a common problem I hear from clients in all practice areas. Here are a few suggestions:
- Try to collect a larger retainer initially.
- Actively push the use of credit card.
- If it is capable, set your time and billing system to alert you when you are at say 85%-90% of time used. Some systems will alert you when entering a time sheet after this level has been reached.
- Have someone assigned to review your Work in Process Report daily to identify any client reaching the 85%-90% level and notify you accordingly.
- If more work is to be done insure that the client is promptly billed for additional retainer before work reaches the 100% mark.
- Consider billing the client electronically if this is a method that works for the client.
- Postpone work until an additional retainer is received. If this course is chosen insure that this does not violate any ethical guidelines or responsibilities.
The key here is assigning someone the daily responsibility of monitoring retainers, having a good time and billing system, and using the managment reports from the system to stay on top of retainer useage.
John W. Olmstead, MBA, Ph.D, CMC
Oct 01, 2008
Question: We are a 12 attorney firm located in the mid-west. We are concerned about the impact that the economy is having on our practice and the current business environment. Our business is down and we are unsure what we should be doing financially to evaluate and improve performance – and survive.
According to Thomson West PeerMonitor Index the first quarter of 2008 marked the lowest point in nine quarters. Demand for legal services is shrinking, the billable hours growth rate has been declining since the second quarter of 2007, and productivity has been shrinking since late 2006. Trends are casting 2008 to be a challenging year for law firms.
Management of cash flow is critical. Here are our suggestions of how to examine where you are based upon receipts and your pipeline of future collections:
- Monthly BillingsAre you budgeting your fee billings? Are your billing and collections on track? Are your individual attorneys and other producers meeting their revenue goals? Why not?
- Collections and ReceiptsAre your collections in alignment with your cash requirements for firm expenses, client advances, loan repayments, and attorney draws. Remember – the total expenses listed on the income statement does not represent all of your cash requirements. Balance sheet accounts such as partner draws, client advances, purchase of assets (equipment), and payments on loans, also involve uses of cash and must be taken into consideration. Typically, there is a lag of three months between the time of when you incur expenses and do work for a client and receive payment. Be aware of potential cash deficits.
- CostsHow are your actual expenses/costs tracking against your budget? Are you within your budget? If not – why? Investigate reasons. If over budget should you cut costs or is there a way to increase revenue? Sometimes you have to spend money in order to make money. What costs should be cut – and which should not? Be careful cutting marketing/client development investments.
- Accounts ReceivableAre they increasing or decreasing? What percent are they of your annual billings? Fifteen percent is high – five percent is within the range of acceptability. Uncollected accounts can sink the firm – stay on top of them with an effective management system. Deal with collection problems early – formulate a client acceptance/credit policy – get retainers up front – reject problem clients from the onset.
- Work in ProgressIs your work in progress increasing or decreasing? Why? Investigate reasons.This represents future receivables and future receipts. Are you on target? Bill immediately anytime during the month if work is completed – don’t wait until the end of the month? Bill monthly and cut-off bills by the 25th of the month so they are in the client’s hands by the 28th or 29th of the month.
- Unbilled Client AdvancesGet money from clients up front to cover these expenses or bill them immediately upon disbusement (if total client advance balance reached $100.00) regardless of the billing cycle established for the client’s fee billing. One exception may be contingency cases.
- Realization RateThe realization rate is the percentage of fees collected from the billable work of the firm’s timekeepers. Low realization rates indicates that attorneys are not effectively utilizing firm resources. Realization rates should be no lower than appropriately 90 to 95 percent.
- Lawyer – Client – Area of Law – MetricsExamine collections, accounts receivable, work in progress, unbilled client advances, unearned retainers, by lawyer, client, and area of law. Spot problems and deal with issues immediately.
- Producers Time ReportsAll producers (lawyers, paralegals, and staff) should keep time on billable and non-billable time and should enter into the computer system daily. Weekly time reports should be produced weekly and reviewed by firm management to insure that goals are being met for billable and non-billable time. Each producer should be provided with a copy of their own report weekly as well. Firm management should spot problem areas and identify reasons – i.e. – not putting in the time, lack of resources to delegate work, poor time managment or time keeping habits and practices.
- Trust Account BalancesReview this report weekly. If funds can be applied to work performed – transfer funds over to the firm’s operating bank account. Notify clients that need to replentish their retainers.John W. Olmstead, MBA, Ph.D, CMC
Jun 29, 2007
We are often asked about skill requirements for office managers/bookkeepers in small law firms. (Six attorney and under firms) Many law firms in the six attorney and under size have shared with us their frustration in staffing the billing and accounting function. Often their investment in computerized billing and accounting systems fails to yield desired results due to poor accounting and management skills. Many small law firms assume that legal secretaries also have requisite accounting and management skills. Our experience has been that often this is not the case. Training, skills, and work behaviors are often different. Bookkeepers/accountants and secretaries are different animals. Many small firms are better off creating a accounting/bookkeeping position and staffing the position with a qualified bookkeeper/accountant. For many firms under six attorneys that have fully automated the billing and accounting function and have distributed time entry, this is not a full time position. In such instances many firms have either recruited a part-time bookkeeper/accountant solely for the accounting function or have created a combined position of office manager/bookkeeper. This justified a full-time position. Look for the following skills when evaluating candidates. Professional training in bookkeeping and accounting fundamentals as well as management principles.
A basic bookkeeping class should be a minimum requirement.
While a college degree should not be a requirement for the small firm, some college courses in accounting and management is desirable.
Two years+ prior experience in a bookkeeping/accounting position in a professional services firm such as law, accounting, consulting, etc.
Prior experience in a law firm bookkeeping/accounting position is desirable.
Experience with computers and accounting software as well as spreadsheets. On hands experience with the accounting software that the law firm uses is a plus. However, this is often not possible.
Prior office management experience in a law or other professional services firm if this is to be a combined position.
Professional and able to deal with multiple demands, multiple masters, and the politics of a law office.
Nov 27, 2006
As we approach the Christmas holiday season we need to begin thinking about next year. Here are some suggestions:
- Take a serious look at the firm's present position in the marketplace. Review financials, compare against financial ratios, compare with both firm past history and against law firm benchmarks. Examine how well the firm is competing. Is the firm too dependent on a narrow base of clients? Is the practice at risk? Conduct a client survey and obtain client feedback both on firm performance as well as possible unmet needs and opportunities. Consider a comprehensive management review.
- Formulate business goals and develop a strategic business plan as a roadmap for the future.
- Design and simplify business reports designed to measure the goals identified in the strategic business plan. Strive for a one page summary as the primary report. Require all timekeepers in the firm to submit personal one page business plans which in addition to outlining goals for the year provided fee revenue goals with an element of stretch. The goals should have a stretch component but yet be realistic and attainable. These plans should be approved by the Executive Committee, Managing Partner or the Partnership.
- In all of our client engagements we typically discover that the root cause of most problems is poor internal and external communications. Poor client service, staff competency and morale, interoffice conflict, and client defections typically can be traced back to poor communications. Work on improving internal communications with firm personnel and external communications with clients and prospective clients. Yes, you have to have meetings now and then. Devise systems to improve communications and implement properly. If a meeting is required – conduct it properly, use agendas and take minutes. Use your email systems. Match the richness of the communication method with the nature and depth of the message to be communicated.
- Improve relationships with your clients. Lack of responsivenesshas is the number one reason for client dissatisfaction.
- Find ways to focus the firm and foster accountability from all.
- Undertake a few projects at a time that can be realistically accomplished. Delegate tasks across the firm. All firm personnel should have marketing responsibilities – from the receptionist to the senior partners and everyone else in between. Databases must be maintained, newsletters and articles written, presentations given, clients to be wined and dined, etc. There is work for everyone.
- Law firms must adopt management structures that enables the firm to act decisively and quickly. Structures that do not support such a culture must be replaced.
- Come to grips with the fact that times are changing and law firms are going to have to change and reinvent their firms dramatically in the next few years.
John W. Olmstead, MBA, Ph.D, CMC
Nov 21, 2006
I have seen more law firms and other business firms destroyed by poor cash flow than any other calamity. Cash flow is what keeps owners, partners and administrators awake at night. Many of our law firm clients have asked us for tips on getting paid. Here are some thoughts and suggestions.