Focusing on Your Net Income

Volume 38 Number 6

By

About the Author

Peter D. Roberts is the practice management advisor in the Law Office Management Assistance Program of the Wasington State Bar Association.

Law Practice Magazine | November/December 2012 | The Client Service IssueIn this issue, I want to talk about preventing the diminution of your potential net income. So what is “net income” for a lawyer?

YOUR SAFETY “NET”

Net income is “what’s left over” after deducting office overhead costs and staff costs from gross fees. Your net income (pretax) is comprised of the following:

Disposable Income—the economist’s term for the money you get to spend on yourself; this amount is the largest part of net income.

Fringe Benefit Costs—the amounts that you pay for health insurance and other insurance benefits; fringe benefit costs that you pay for your staff are part of overhead costs of the law firm.

Retirement Plan Contributions (Investments)—you want to prosper!

The respective proportions of these amounts may approximate 60 percent/30 percent/10 percent, depending on what health insurance costs in your state. The sum of these three components of net income should be 50 to 80 percent of your gross fees as a solo or per lawyer-owner in a small firm.

OH MAN, THAT’S “GROSS”

Gross fees are the amounts that the clients pay for your services—not the costs. A solo practitioner without staff may realize a percentage of gross fees as net income of up to 80 percent of gross fees. Having some staff, which translates to a significant cost, usually means a net income percentage of 50 to 60 percent. Having staff can increase your ability to handle more matters. More matters should generate increased gross fees. Table 1 (below) shows a relationship of net income to gross fees. Because gross fees drive the business, let’s look at what drives gross fees.

New work.
Referrals should be a major source of potential (paying) clients. New matters come from anonymous sources, such as the phone book, an office sign, a lobby reader board, or a potential client may have seen your name in a local newspaper or blog. New matters come from personal referral sources, such as social contacts, church groups or volunteer activities that you engage in. New matters come from trusted referral sources, including bankers, physicians, insurance agents or therapists. New matters, of course, also come from clients, former clients, opposing parties or opposing counsel. Referrals from opposing parties or opposing counsel are the “holy grail” of referrals for obvious reasons—you earned their respect. Take special pride in these referral sources.

New clients also find their way to you through your several reputations. Your professional reputation establishes you among colleagues. Your practice area, integrity, honesty, level of service, knowledge of the law and how easy you are to work with are all factors. Your social reputation establishes you among colleagues, friends, family and staff. Your social reputation includes how others perceive your table manners, use of alcohol (if applicable) and general social bearing as you engage in professional activities, hobbies, sports activities and cultural interests. Are you available or always “busy?” Your Web reputation establishes how you are perceived by the world through your various Web platforms. Choices include website, Avvo profile, blog, Facebook page, LinkedIn profile, email etiquette, Twitter activity, etc. Your street reputation establishes how staff and vendors perceive you. It describes your office and how you handle paying the bills on time. Other examples include your level of professionalism and respect when communicating with your staff; nonmonetary fringe benefits, such as staff scheduling flexibility; and, of course, your management of anger and other emotions, including how you communicate with staff when errors are committed.

Nonrefundable or flat fee.
It’s your money up front; you earned it with the caveat that, if you withdraw two days later, ethics and good client relations suggest that you refund some portion or the entire fee. Check the “not unreasonable fee” language of your jurisdiction’s ethical rules. The ABA Model Rule of Professional Conduct 1.5 covers fees.

Advance fee deposits.
Advance fee deposits are unearned funds paid to you that are not yet yours. Beware of the person who “changes his or her mind” and wants a refund—now—before the check has cleared as collected funds (not as “available“ funds). It’s a scam, most likely. Tell the client that your firm requires a waiting period. Always insist on this payment. Asking tests the client’s willingness to invest in the matter. Cash in the bank beats an account receivable any day of the week. Consider using language in your fee agreement that calls for replenishing the advance fee deposit after the balance winds down to a certain amount.

Timekeeping.
I can’t overemphhasize the importance of using a time and billing software application. Such applications build a database for analysis and speed up the whole time and billing process. Capture as much effort as possible in your automated time and billing system. Time not recorded is time not billed, and what is likely missing is time that you spent on the telephone and email.

Billing.
Billing is extending credit. If you extend credit, do it knowingly and with some sense that the client is capable of writing a check to pay your bills. “Capable” is one thing; “willingness” is quite another. So keep the client informed and return the clients’ phone calls. Avoid delayed billing. Billing in September for all fees and costs through the prior June 30 tells the client that you are in no hurry to be paid.

And finally, don’t work for too many clients who cannot pay your bills. A lawyer certainly is busy, but a lawyer is not productive if not being paid.

TABLE 1

Annual Yield to the Lawyer at Selected Gross Fees per Lawyer

Gross Fees per LawyerOverhead CostsNet Income per LawyerNet Income Percentage

$75, 000

$10,000
(No staff)

$65,000

86.6 %

$125,000

$25,000
(Part-time staff)

$100,00080.0 %

$175,000

$50,000
(one full-time staff)

$125,00071.4 %

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