Law Firm Financial Management – Financial Red Flags

Question:

Our firm is a twelve lawyer firm in Chicago and our practice is a business litigation firm. We have eight partners in the firm and we are managed by a three-member management committee that was just formed this year. I am a member of the committee and I am responsible for the general financial oversight of the firm. I am trying to get a handle on law firm financial metrics and especially what are the financial warning signs that I should be aware. If you have an outline or list that you would be willing to share we would appreciate it.

Response:

Here is a short list of what I call financial red flags that you might find helpful:

Expenses increasing at a greater rate than revenue
Revenue per partner decline
Revenue per lawyer decline
Partner earnings decline
Overhead per lawyer increasing at greater rate than cost of living
Billing realization < 95% (current environment 85%)
Collection realization < 97% (current environment 87%)
Total realization vs standard < 82% and total realization vs standard > 95%
Accounts receivable over 180 days > 25%
Unbilled time over 180 days > 15%
Contingent fee hours worked > 8-10% of total client hours recorded (Non Contingency Firms)
Occupancy costs > 10% of fees collected
Debt > tax basis value of fixed assets (borrowing to pay partners)
Line of credit borrowing not “cleaned up” for 90 consecutive days
Debt > partner contributed capital
Debt > ½ of total inventory (fees only)
Payouts to retired partners > 8% of net income

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

Posted at 07:26 AM in Financial Management
Tags: Financial, Firm, Flags, Law, Management, Red

Dec 11, 2019

Law Firm Financial Management – Financial Red Flags

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