By the time most of you read this, the end of the year will be quickly approaching.
This is a good time to look at the fiscal outlook for your firm or practice
so that you can go into the new year fiscally healthy.
Here are some tips in no particular order. Hopefully some will help with
your financial well-being.
Have a good
financial advisor or accountant. This should be someone who works with solo
and small firm lawyers. This person should be an advisor and not a bookkeeper.
should have someone who does the bookkeeping on a monthly basis. While most
accounting packages make it much easier to do the bookkeeping, this is not where
practitioners should be spending their time.
In addition, all firms/practitioners
must monitor all staff members who work with billing, collections or financial
records. All accounts must be reconciled monthly and reviewed by a partner.
If there is more than one partner, this responsibility should be alternated
to avoid fraud.
Have a partner
be the first to open all bank statements. According to J. Richard Block, CPA,
with the firm Weil, Akman, Baylin & Coleman, “Even if you write and sign
all the checks, people can embezzle from you. I know several lawyers who have
had checks stolen from the back of the check book and forged. If you don’t
open the bank statements you won’t find out until it’s too late.”
no matter how small or how new, should have a written annual and monthly budget.
This budget should be reviewed regularly. Ideally, you should work with an
accountant familiar with law firms of your size. Your budget should include
all fixed expenses for the coming year on a month-to-month basis.
know when all of your accounts payables (A/P) are due. This will help with
cash flow. You should have a spreadsheet listing all of your fixed expenses,
the amounts due and dates due. No A/P should be paid without partner approval.
have a projected budget for non-fixed expenses such as education, publications,
marketing/client development and supplies. If you have been in practice for
a few years, you should be able to know what you spent each year on these expenses
to make an estimate for the coming year. You should be able to compare months
and years to determine differences or when there may be a greater need for
have a technology budget for at least the next year. If you have others in
the office, get their input on what problems they may be currently having and
what types of purchases may be needed within the next year. Put the cost of
training into the budget.
review Rule 1.5 on Fees and on Attorney Trust Accounts. Make certain that everyone
in your office knows the rules.
Do you know
how much you will need to generate in fees in order to pay your expenses and
your salary? You should have a budget for projected income. Your budget for
your expenses lets you know how much you need to just cover expenses, but you
will also have to add in your own salary.
According to Ward Bower of Altman Weil, Inc., knowing your costs is fundamental
to financial management. It is important to know your per-lawyer overhead.
To know the cost of your lawyers, add compensation and benefits and divide
by 90 percent of expected billable hours to get the actual number of billable
hours needed to cover costs.
Do you know
your projected cash flow for the next six months? You should know what will
be coming in and what needs to be paid.
as though money was tight. I knew a managing partner of a firm who said, “If
we had managed the practice as well when times were good as when times were
bad, we would not have noticed that times were bad.” Unless there is
a good reason to spend more with a particular vendor (such as outstanding service,
business referral, familial relation), if you can get it for less, do it.
tip from Richard Block: use a payroll service. Yes, they cost money, but they
also eliminate tax penalties and having to prepare quarterly reports, paying
taxes weekly at the bank, etc. You can sleep better at night.
should have signed written fee agreements. At a minimum, all new clients should
receive a fee agreement. They should understand that little or no work will
begin on a matter until the fee agreement is signed. There should be a mechanism
for knowing whether or not a fee agreement has been signed before putting too
much time into a matter.
have a written billing and collection policy. These policies should be given
to the client at the initial interview and explained (for samples of billing
and collection procedures, visit www.msba.org/departments/loma/articles/financial/collectionforms.htm
be written policies for billing and collection even for contingency work. The
policies should state the procedures for out-of-pocket expenses, replenishing
the account for expenses, payment from fees for outstanding expenses.
According to Steven Manekin, CPA, with Ellin & Tucker, Chtd., “For
the practitioners who do not bill by the hour. They need to monitor their files
carefully and make sure they keep them on the fast track for settlement. They
need to monitor their settlements by type of file, i.e., workman’s
comp, personal injury, etc., to allow them to forecast their revenues and budget
on a monthly basis.”
Keep a record
of referral sources and who sends the most profitable cases. Devote more time
to sources that send you good cases. “Every two years, make a list of
all the cases for which you received fees in the past three years, along with
the type of case, amount billed, amount received and referral source,” Linda
Ravdin, Esq., notes in the April 1999 issue of Law Practice Management.
“Cultivate the referral sources who have made you the most money. Stop
taking the types of cases that have made you the least.”
the types of cases that are most and least profitable. Stop doing work that
is not profitable.
an attitude of “full-day accounting,” as suggested by L. Donald
Holland and Paula Turner in the July 1999 edition of Accounting for Law
Firms. You and everyone in your office who does billable work should be
able to account for a full day. This includes time that is not billable or
client-related. It could include time spent marketing, reading, CLE, etc. This
is important in small firms to make certain that time is being used wisely.
taking credit cards to speed cash flow. (For information on the Ethics Rules,
go to www.msba.org/members/ethics/default.asp and
print, or review Ethics Opinions 2001-15, 91-5, 78-19, or send an e-mail with
the subject line “credit card information” to email@example.com Include
your fax number and we will fax the opinions to you.
to John G. Iezzi, CPA, (Results-Oriented Financial Management: A Step-by-Step
Guide to Law Firm Profitability, ABA Law Practice Management Section, 2003)
“a firm should perform an annual analysis and ascertain the extent to
which each client is generating revenue.” He points out the difficulties
of having a firm depend too much on one client or even one partner to generate
revenue. Some of the other issues this analysis may point out are whether the
firm is client or case-oriented and whether major clients are more aligned
with a particular attorney than with the firm.
a philosophy that each year a firm should “fire” one or two of
its least profitable clients. Obviously it may not be possible if there is
litigation or other factors that prevent this, but getting rid of clients that
are not profitable frees you up to find better clients.
Have a retirement
plan. According to Richard Block, it’s never too late. His favorite is
the SIMPLE Plan. You can defer salary or self-employment income of up to $10,000
in 2005, plus more if you are over 50. You must contribute 3 percent to your
employees, but only if they contribute themselves. You also get to put away
3 percent for yourself in addition to the deferral.
Take advantage of 401(k) plans. It works similar to SIMPLE but can get higher
deferrals. New for 2006 is the Roth 401(k). There is no deduction from your
income going in but no tax on the way out – sweet deal if you are under
your expenses. Enough said.
more money? There is no simple secret. The rules are simple. 1) Pick clients
who can and will pay for your services. 2) Receive a retainer from them before
you begin work. 3) Use a fee agreement to confirm the fee and payment arrangement.
4) Bill promptly and regularly using each entry on the statement to clearly
describe efforts on behalf of the client with more than a reminder statement.
6) Cut off the work when the client has not paid for 90 days and or has not
made arrangements to pay.” (“How to Make More Money,” Law
Practice Management, ABA, April, 1999.)
Work hard and get paid. You deserve it!