Finance: Timekeeping by the Numbers

Volume 38 Number 4

By

About the Author

Peter D. Roberts is the practice management advisor in the Law Office Management Assistance Program of the Washington State Bar Association. He is a frequent speaker and writer and has consulted with over 650 WSBA members in Washington, Alaska, Illinois, California, Idaho, Oregon, and Texas.

Law Practice Magazine | May/June 2012 | The Time Management Issue

You know who you are: Each month you pull out those legal pads from client files and extract the events you wish to bill by typing the task descriptions, time spent and amounts into a document. It usually takes the better part of a Saturday or Sunday. I hope that I am not describing what you do, because there is a better way.

Any law practice has to decide whether and how to use technology in timekeeping, billing, trust accounting and general accounting. It is timekeeping and billing where I strongly recommend that a software program be used. Why? Save Saturdays or Sundays for personal pursuits.

In addition, using software can save a huge amount of time in bill preparation. A mouse click will create a pre-bill that you can edit. Another mouse click will create a final bill that can be emailed or snail mailed. Accuracy is enhanced because the software does the math. The math may also include updating of the trust account by bringing current the available balances in each client ledger—thus speeding up the reconciliation process.

Reports enable you to see trends, analyze practice areas and measure productivity as well as keeping an eye on accounts receivable. Reports enable you to know which legal work is paying the bills; and they enable you to understand the relationships between fees worked, fees billed and fees collected. Typically, over time, there is an average 10 percent drop-off between fees worked and fees collected. Keep in mind that reports from time and billing software may require use of a spreadsheet to realize the other relationships between various parts of the data.

THE PIPELINE REPORT

Here is an example of a spreadsheet report using data from time and billing software: 
December 21, 20XX
Year-to-Date Last YearYear-to-Date This Year

Fees

Fees

Fees

Lawyer

Fees

Fees

Fees
WorkedBilledCollected %NameWorkedBilledCollected %
$90,000$85,000$80,000   89%Sara Johnson$98,000$90,000$85,000   87%
$75,000$70,000$65,000   87%Bill Greene$80,000$78,000$60,000   75%
$165,000$155,000$145,000 88%Firm Totals$178,000$168,000$145,000 82%

% = Fees Collected/Fees Worked

The data compares results among lawyers as well as comparing lawyers to themselves in the prior year. Notice that fees collected in total are the same each year, but the drop-off increased from 12 percent (100 - 88) to 18 percent (100 - 82). This drop-off is also described as “realization.” The report is easier to interpret in a strictly hourly practice because data from contingent fee matters, if significant, may obscure conclusions that can be drawn.

THE BILLING BUDGET

Consider using a billing budget and link the achievement of this billing budget to bonus payments. As of the prior December 31, you should be able to determine your balance of WIP (work in process, or unbilled fees). You finished writing off or billing, so your resulting WIP balance is realistic. Take 33.3 percent of this balance. One third of, say, $120,000 ($40,000) is your billing budget for January. For the subsequent months, see Figure 1 (note that after January, “balance forward” means the arithmetical result obtained by taking the 12/31 actual balance of WIP, adding new actual WIP, and deducting that month’s billing budget (not actual billings); and in February, take the balance forward, add actual new WIP and deduct that month’s billing budget):

Month

WIP/Balance Forward

Budget

33.3%

New Actual WIP This Month

Actual Billings

Cumulative Billing Budget

Cumulative Actual Billings

January

Actual  $120,000

$40,000

$25,000

$20,000

$40,000

$20,000

February

Pro forma $105,000

$34,965

$27,000

$15,000

$74,965

$35,000

March

Pro forma  $97,035

$32,313

$30,000

$30,000

$107,278

$65,000

April

Pro forma  $94,722

$31,542

$20,000

$50,000

$138,820

$115,000

May

Pro forma  $83,180

$27,699

$25,000

$40,000

$166,519

$155,000

June

Pro forma  $80,481

$26,800

$40,000

$30,000

$193,319

$185,000

July

Pro forma  $93,681

$31,196

$30,000

$35,000

$224,515

$220,000

August

Pro forma  $92,485

$30,798

$28,000

$40,000

$255,313

$260,000

September

Pro forma  $89,687

$29,686

$15,000

$25,000

$284,999

$285,000

October

Pro forma  $75,001

$24,975

$35,000

$55,000

$309,974

$340,000

November

Pro forma  $85,026

$28,314

$25,000

$25,000

$338,288

$365,000

December

Pro forma  $81,712

$27,210

$30,000

$40,000

$365,498

$405,000

Totals

Actual  $45,000

$365,498

$330,000

$405,000

In this example, the billing lawyer was eligible for a bonus in August, based on the cumulative comparison of actual billings with the budget. Note that the budget calculation for the year exceeded the new WIP. Using 33.3 percent derives an annual billing budget that equals 90 percent of total available WIP (starting balance + all new WIP for the year).

DETERMINATION OF FLAT FEES

What about analyzing the amount you choose to charge for flat (fixed) fees? Your time and billing software summarizes the time spent on different kinds of files, i.e. wills, criminal cases, divorces, bankruptcies, etc. Calculate the average hours per matter for each type. Multiply this average by your present hourly rate. Refer to utbms.com, a site that contains further links to codifications of the tasks of differing practice areas. Use these Uniform Task-Based Management Systems (UTBMS) tasks to better estimate the effort involved for the matter. I recommend adding a “margin” of 10, 15 or 20 percent to this total. Why? You may have forgotten a task. You may have underestimated the time. You may have done both. But the most important reason is because you are adding value for the client by taking on the financial risk of the matter.

Each flat-fee matter is a “bet.” You are betting that you will accomplish the scope of work at or below the quoted fee. No one bats 1,000, so do not measure success in terms of winning every bet. Instead, use your time and billing software to calculate the total fees from flat-fee matters and divide that amount by the total hours worked on those matters. The resulting aggregate hourly rate should exceed your nominal hourly rate because of your more efficient performance of the work, and finely tuned skill of estimating appropriate flat fees, which include a margin built in (a skill that will come with experience over time).

Visit the Legal Technology Resource Center on the ABA website. Review the time and billing products described in the comparison chart. Some products are stand-alone. Others include time and billing within a practice management suite. A basic and inexpensive time and billing software that I recommend is RTG (rtgsoftware.com).

If you missed the 2012 ABA TECHSHOW, make plans to attend next year’s to evaluate many time and billing products up close. Your state bar also may have a practice management advisor who can assist you in selecting time and billing software for your particular needs.

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