From becoming more selective about the work you take in to setting fee expectations, from optimizing collections to managing expenses, your financial security will grow dramatically as you master the role of money in your firm. While many attorney-owners are not as comfortable as they'd like to be when it comes to reviewing monthly economic metrics, it's a skill that you can — and must — learn.
Your firm's systemic profitability is what counts, not its gross revenues. After all, plenty of hundred million dollar companies go belly-up. And unless you've put in place systems to "follow the money," you'll never achieve the business stability you seek. Fortunately, like the rest of The 8 SuccessTrack Fundamentals, following the money isn't rocket science. You have to establish and regularly use a few key routines.
AREAS OF FOCUS
Raise the Bar on Work You Accept
By accepting work that is not clearly profitable for your firm (or not likely to be), you're taking on an ethical obligation to commit limited resources to effective representation even though the return to your firm is inadequate or worse. It's stressful and demoralizing.
The solution begins with your marketing program so that the prospective clients and cases coming to you are of a sufficiently high quality to begin with. But even then, you need to assess all new clients carefully to screen for a) their ability and inclination to pay in a timely fashion, if the work is non-contingency, or b) the conservative anticpated-cost-to-anticipated-value ratio, if it's a contingency matter.
How clear are your client selection criteria? How complete are the forms and checklists you're using when interviewing a prospective client? How do you handle it when a subtle red flag goes up? Where do you need to be more specific with colleagues who, despite all good intentions, refer to you cases that are not up to snuff? Your client intake process is critical, and we'll show you how to improve yours.
Here's one of the most challenging paradoxes all service business owners face: by saying “no” to less profitable work — and thus turning away the revenue you'd receive (or hope to receive) — you'll actually attract better, more profitable work. It's often scary at first (like when you raise your fees), but raising the bar on the work you take is the first critical step to upgrading your firm's financial foundation.
Master the Art of Fee Agreements and Billing
How you handle the topic of money when speaking with prospective and existing clients is a barometer of your firm's overall health. Along with complaints about service, complaints about fees and billing practices are at the top of the unsatisfied client's list. Pressure on the business model of the billable hour is leading to alternative pricing models, and the longer you wait to incorporate these approaches, the greater the risk that a competitor will win your prospect's work with a more appealing financial approach.
From initial conversation to the fee agreement portion of your engagement letter, you must be crystal clear about your firm's financial requirements (such as how you will be charging for specific kinds of work done and specific payment terms — including stipulations such as "evergreen provisions" that protect you from having to finance billable or flat fee work hours).
Your bills are one of your most important communications with your clients. Bills are not merely financial transactions — they are a crucial component of client service. How you summarize and quantify the value you're providing to clients in your bills is part of building and maintaining your relationship with them. You can never completely eliminate the possibility of a client complaint about your fee, but there is no excuse for giving them ammunition because your billing procedures are weak. We'll show you how to run this part of your practice properly.
Stay on Top of Your Books
If there's one indicator that differentiates a robust firm from a fragile one, it's the state of its books. Strong firms get and stay that way in large part because of an almost religious zeal to "follow the money." Weak firms let basic financial processes slide, bank statements don't get reconciled on time. Bad numbers (e.g., hopelessly aged receivables) remain in the system, thereby preventing an accurate snapshot of the organization's current financial state.
Obviously, staying on top of your books involves a lot more than doing basic bank recs. It involves the disciplined execution of all bookkeeping and billing functions on at least a monthly basis. It's easier for many service firms to stay current with their accounts payable (because vendors are billing you) than it is to stay current with outgoing bills. When pre-bills pile up and get sent late, then AR grows and pressure builds, and your monthly bookkeeping cycle gets further and further out of whack.
Depending on how sloppy your books and processes are, getting them in shape can require a significant effort. But we have seen repeatedly in our work with firms that once these are in shape, the payoff of having reliable data and increased overall financial confidence is more than worth the effort.
Leverage Associates and Paralegals
By pushing work down to the lowest skill position that can handle the work, a firm maximizes everyone’s output and thus builds the bottom line most efficiently. The most profitable firms create the optimum ratios of associates to partners and paralegals to attorneys. Conversely, when you handle work that could be passed to someone lower down on the legal skill continuum, you're only collecting off your direct hours (and are limited by the number of hours you can cram into a day).
Beyond the immediate financial benefit of leveraging, there are two additional reasons to push work down to qualified associates, paralegals, and legal assistants. First, you free yourself up for new business development. Second, you accelerate the professional development of more junior personnel by giving them more substantive work.
Some attorneys are reluctant to leverage downward for fear of running afoul of UPL rules, or simply because they don't want to invest the time in training to be confident in the delegation process. Effective leveraging does require having strong, well-trained people. But isn't the increased profitability you'll achieve worth it.
Analyze Financial Metrics Monthly
You can't manage what you don't measure. This basic management maxim conveys why reviewing monthly financial metrics is essential to the health of your firm. These regular ‘snapshots’ of your business provide data that are essential for making smarter decisions about almost every aspect of your operation.
Here are some of the metrics and reports you should be analyzing each month. This list is not prioritized; they're all important. And all can be examined for the firm, as a whole, and for individuals:
- new opened matters
- time keeper records
- utilization and realization reports
- cash collected
- WIP (work in process) billings
- expenses
- accounts receivable
- average daily account balances
- accounts payable
- profit/loss statement
- projected budget vs. actual budget
You get the picture. If you don’t have this information, you don’t know where you stand on these core issues. With proper timely attention to these metrics, you won’t find yourself getting sideswiped. You'll become a better manager of your firm.
We'll show you how to institute the systems and approaches to ensure that your regular financial metrics are working to support your success.
