Volume 20, Number 6
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TEN SURE WAYS TO FAIL
By David J. Bilinsky and Reid F. Trautz
David J. Bilinsky is the practice management advisor and staff lawyer for the Law Society of British Columbia. Reid F. Trautz is the practice management advisor for a Washington, D.C., bar association.
If you've been frustrated by money management, pore over this list of the 10 most common mistakes small firms make-and how to get safely past them.
Don't develop a cash flow and financial plan. For an annual (12-month) period, prepare a month-by-month detailed budget. Build in all expenses that you know will occur, or that you can anticipate, and when they must be paid. Calculate in unexpected expenses. Build in marketing time and expenses. Build in your draw. Next, compare the total expenses to your anticipated revenue. If you don't have a historical basis to forecast income, make an educated estimate based on your marketing plan.
Rely on total billable hours rather than realization rates to track progress. The realization rate is the percentage of actual income paid to the firm from the billable hours of each timekeeper. Your computer-based time and billing program should be able to create this report for you. Examine the report and use it to help guide discussions of compensation for partners and associates.
Use accounting software that doesn't have financial modeling and reporting. Good decisions require good data. There are many good general and legal accounting packages, but recognize that accounting packages exist for accountants. We need software that will give us insight into how we are doing as business owners. Look for packages that build in as many management and modeling reports as possible.
Look closely at the software you now use. Most of the legal accounting packages put the powerful financial analysis tools into the "Pro" versions, which are suitable for larger firms. Solos and smaller firms face a Hobson's choice: Acquire the basic level of the software and forego the higher-end financial tools, or pay thousands of dollars for a full version that you will never use.
Fail to regularly reconcile trust accounts. A client trust account often poses a lawyer's greatest risk for ethics trouble. It is certainly acceptable to have a bookkeeper administer this function, but the lawyer must remain active in the oversight of the account. The lawyer should reconcile that account each month or thoroughly review the reconciliation completed by the bookkeeper. Here are quick tips to help keep your account in good shape:
- Keep separate ledgers for each individual client.
- Never pay a client with cash; always have a check as a record.
- Don't disburse a check to a client until the deposited funds for that client have cleared.
- Have a good audit trail.
- Reconcile your client trust account monthly, regardless of how boring the task seems.
Many jurisdictions require that records of such accounts be kept for a period of years. Check your state's rules to make sure you are in compliance.
Don't track your time. The first step in determining whether you were profitable on a sale of a service is being able to determine the costs of services delivered. To do that, you need accurate costing mechanisms that can include both direct and allocated costs. Direct costs are your time, plus any direct disbursements incurred for the file, such as court reporter fees and filing fees. Allocated costs are the file's share of the office overhead, such as staff salaries and rent.
Because the biggest direct cost is the time that you put into the file, you cannot determine what it cost you to produce a file unless you can track the time you put into it-billable, nonbillable, written off, and so forth. When it comes time to distribute funds among partners, not knowing the true costs of the files can lead to inequities. Looking only at the gross revenue generated at the conclusion of a file without knowing the costs incurred can lead to bonuses being paid on unprofitable files.
Think you don't need a fee agreement with every client. Communicate in writing with every client during, or immediately after, the initial consultation to define your professional relationship and to avoid misunderstandings about the timing, scope, and cost of your legal representation.
A well-written fee agreement encompasses more than your hourly, flat, or contingent fee. It should define the parameters of the expectations that rest on both parties—for the lawyer these include the work to be completed and when and how often results will be communicated; for the client these include the need to promptly complete delegated work and the need to top up retainers. It should also address your rights (for example, to withdraw) and your client's rights (for example, to terminate representation). Avoid legalese.
Put off dealing with underperforming lawyers. Schedule monthly meetings for the purpose of examining everyone's performance against stated financial goals: billable hours targets (WIP), WIP billed (bills rendered), bills collected, realization rates, accounts receivable balances (net increase or decrease), accounts written off or deemed uncollectible, disbursements incurred, disbursements billed, disbursements written off, and status of outstanding files. When everyone in the firm is required to report monthly to all other partners, you instill a culture in the firm that is self-correcting if someone starts to veer off course.
Always assume more risk than needed when agreeing to represent clients. Ask yourself the following questions when considering taking on a new client:
- Looking at my present workload, do I have adequate time to devote to this matter? Or am I taking this client solely because it has been a while since the last client called?
- Do I have the legal abilities and experience to handle this matter with the required level of competence?
- Do I have the financial resources to handle this matter?
If you answer no to any of these questions, consider associating with additional counsel, or refer the client to other lawyers. You should also assess whether you can accept the financial risks associated with taking the matter. It's up to you to take the initiative-early-to discuss with the potential client fees and costs openly, candidly, and comprehensively.
Avoid having a written office-sharing or partnership agreement. A written agreement among all parties in the firm ensures that everyone knows the terms of the arrangement among them: the expectations, the consequences, and the means to implement those consequences. Office-sharing agreements cover issues between solos sharing the same office suite. Common issues include management of the suite, lease payments, confidentiality, signage and sharing of the costs, and services of common employees.
Every partnership agreement should cover management issues, capital contributions, income-sharing and compensation issues, disability, adding new partners, voluntary partner withdrawal, partner expulsion, and dissolution. It should also incorporate the requirement for adequate life and disability insurance to ensure that, should someone die or become disabled, there is proper compensation for the partnership share, and that the firm can pick up the pieces and carry on the business.
Rely on the lottery for your partnership retirement plan. Another major issue facing smaller firms is how to deal with the introduction of new partners while funding the buyout of existing but aging partners. Without a succession plan that compensates aging partners over time by establishing a retirement fund, the firm might be unable to attract new partners.
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- This article is an abridged and edited version of one that originally appeared on page 12 of Law Practice Management, January/February 2003 (29:1).
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