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Keep profits on track with this quick 5-point spring financial checkup

It happens every January. The firm makes grand resolutions to improve the financial performance.

But by spring, the attorneys get bogged down in their old habits. It’s the administrator’s job to keep the attorneys focused on their financial resolves, because their abilities and interests lie far more in law than in business. Take a hard look now at what’s going on financially lest the firm face the bleak money picture that too often appears at year’s end.

An A/R birthday party

Look first at the aging of the accounts receivable. Many a firm lets too much time pass before collecting on the unpaid accounts, and the outcome is often no payment at all. Studies show that at 90 days, a firm has only a 50% chance of collecting on a bill. The hold-off happens to a great extent because the attorneys fear destroying the client relationship and so let large amounts go uncollected until the end of the year. Then they make a big push to collect, and the clients make a big push not to pay. It’s psychological. To the client’s mind, if the attorney isn’t worried enough to call about the bill, why should the client worry about paying it? Or the client assumes there’s another 90 days’ grace because the firm hasn’t made any earlier collection effort.

No more than 15% of the receivables should be as old as 90 days and ideally, none of them should be that old. If the firm is not at that level, take a look at what’s happening with the collections.

Make sure the attorneys are getting the billing information at intake, and that includes finding out where to send the bill, when the client cuts checks, and who the billing contact is.

Make sure they are laying out the payment requirements up front and doing it in the first person: “This is my hourly rate, and this is when I will send the bill, and this is when I expect to be paid.” Make sure too that the firm is taking a second look at any client who complains about the fee or tries to negotiate for a lower fee. Those are the clients who will take longer to pay and might even be clients the firm should not represent.

Evaluate the bills the firm uses. They should state clearly that the payment is “due upon receipt.” Look at the billing follow-up. The firm should not be waiting longer than 30 days to call about non-payments. It doesn’t have to be confrontational, just something along the lines of “We sent your bill on (date) but haven’t received your payment yet. We just wanted to make sure you got the statement okay.” At 30 days, the bill is often stuck on somebody’s desk, and a call gets the check sent immediately.

Keeping the new car smell

Another point to evaluate now is whether the bills are going out on time. At the beginning of the year, firms resolve to do just that, but about this time of year, they go back to their bad habits. The bills for one month’s work should go out no later than a week into the next month. Get the bill to the client early in the month and the firm has a good chance of seeing payment before month’s end. Send it later, and there’s a good chance it will get pushed into the next payment cycle. Bill while the work still has a new-car smell. At that point the client is appreciative of the service and willing to pay. By contrast, wait six months and the logical response is “they must not need the money if they’re just now billing for it.” Worse, with the service now history, “what did they really do for me?” or “I can’t believe they spent that much time on it!” And if the client challenges the bill, the attorney can have a difficult time defending what’s now partly forgotten.

No time, no raise, no bonus

Along with the billing time, check up on whether the attorneys and paralegals are still following the time entry policies. They should be required to enter their time into the system on a daily basis. Some firms withhold bonuses or raises from attorneys who don’t enter their time on schedule or who have unbilled time at the end of the year. For real enforcement, it’s possible to take that a step further and make a rule that everybody’s bonus gets held up if even one attorney fails to enter time as required. Then peer pressure takes over.

There also needs to be a rule that the billers must enter their time directly into the system as opposed to writing it down and having their secretaries enter it. Handwritten notes produce lost hours because the billers are the only ones who know what the work entailed and who can best summarize it on the bill. Spring is also the time to identify the attorneys who have large gaps in submitted time. Chances are, they are not keeping up with their billing. Addressing that now can prevent a year-end revenue shortfall.

Track the plaintiff profits

This is also a good time to take a hard look at the profitability of any plaintiffs’ work the firm is now doing. That type of work isn’t always lucrative, yet it’s not uncommon for a firm to spend hundreds of hours on such a matter and not bring in enough money to cover the hours invested. Look now at the current cost of each plaintiff matter and project the profits, because that type of work can easily become marginal.

Consider the example of a case where the work already put in includes 200 partner hours at $250 ($50,000), 300 associate hours at $200 ($60,000), another 100 associate hours at $150 ($15,000), 125 paralegal hours at $100 ($12,500), and 100 more paralegal hours at $90 ($9,000) for a total of $146,500 in time. If the firm gets a third of the settlement, the matter needs to settle at $440,000 or more to be profitable.

But take into consideration too the other factors affecting the return. If the matter was referred by another firm, the attorneys may have to split the fee with that firm. And what happens if the settlement turns out to be low?

Keep a close monitor on that type of work. Make sure it’s constantly balanced out with enough hourly work to keep the lights on. Also make sure it’s being done as much as possible at the less expensive associate level. And more, make sure the attorneys and staff are entering their time on the matter so that when the firm negotiates the settlement, it has some kind of benchmark to cover the time invested.

Budget money versus real money

At this point, the firm should also evaluate its budget standing. Every firm has a budget, but few firms keep a running comparison of budget to actual numbers. Others print out the comparisons but do nothing about the discrepancies that show up. Look at projected revenues versus what’s actually coming in. Look at projected expenses versus what’s actually going out. See if the billed hours are meeting requirements, and if they aren’t, find out why not – that a major deal fell through or the firm lost a client or even that an attorney is not producing because of illness or divorce. Factor in anticipated increases in areas such as health insurance costs. Set the raise amounts and see how they will impact the year-end figures. And then use this year’s actual numbers to date to project for next year. The firm may need to make new allowances for unexpected swings in income and expenses. Or it may need to delay purchases or hirings or reset expected raise amounts. And there’s a lot more time now to make changes than there will be in November.

Related reading:

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