Best Practice: Financial strategies for surviving in the present economy

Asked and Answered By John W. Olmstead, MBA, Ph.D, CMC Q. We are a 12 attorney firm located in the midwest. 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. A. 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 Billings Are 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 Receipts Are 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 you incur expenses and do work for a client and receive payment. Be aware of potential cash deficits. Costs How 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. Which costs should be cut - and which should not? Be careful cutting marketing/client development investments. Accounts Receivable Are 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 Progress Is 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 Advances Get money from clients up front to cover these expenses or bill them immediately upon disbursement (if total client advance balance reached $100) regardless of the billing cycle established for the client's fee billing. One exception may be contingency cases. Realization Rate The realization rate is the percentage of fees collected from the billable work of the firm's timekeepers. A low realization rate indicates that attorneys are not effectively utilizing firm resources. Realization rates should be no lower than 90 to 95 percent. Lawyer - Client - Area of Law - Metrics Examine collections, accounts receivable, work in progress, unbilled client advances and unearned retainers by lawyer, client and area of law. Spot problems and deal with issues immediately. Producers Time Reports All 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 management or time keeping habits and practices. Trust Account Balances Review 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 replenish their retainers. John W. Olmstead, MBA, Ph.D, CMC, is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA General ListServ, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.