In this issue I want to talk about financial reports and how to communicate financial information.
The managing partner, executive committee and partners/owners have the need both to know how the firm is doing financially and to communicate this financial information more widely to the firm—or perhaps not, as I discuss below.
Every law firm possesses a certain culture involving traditions, hierarchy, “open door” policies, collegiality, respect for staff and the perception of financial information—its relevance, intelligibility and meaning. Consider your firm’s culture. Financial reports can be insightful, yet financial reports can also be inciteful! (Or, more correctly, inciting.) Reports of lawyer performance certainly can cause some level of tension. Further, people perceive financial information with different understandings and emotions. What acceptance by a firm’s lawyers is there for circulated reports of performance? For example, some may resist a “race horse” presentation of data, with lawyers listed one after the other, in descending order. Contingent-fee lawyers may well insist that their numbers are not comparable to those of lawyers in hourly practice, and vice versa. And if staff sees such information, with their practice group falling behind other such groups, will morale suffer?
The managing partner and management committee surely must have access to whatever financial information is available. Yet even at this level I recommend “less is more.” Top-level numbers for the firm are, of course, essential. The details supporting the top-level numbers must be readily available—but not necessarily included in the top-level report unless there is a major firm financial event to report, such as a client who paid $50,000 this month or the payment of the $50,000 premium for the professional liability insurance policy.
Below the managing partner and management committee, consider circulating only a lawyer’s or paralegal’s personal report, without any comparison to others. In large firms, segregating the presentation between hourly and contingent fee practice groups may also be possible and preferable.
Or one may choose not to distribute lawyer reports at all. If so, keep the report within the management committee, but make it available upon request by individual lawyers. If this on-request practice is followed, the managing partner can pay private visits to those lawyers whose numbers are “soft” to discuss the underlying factors why. Perhaps that high-flying client, who paid the firm $106,000 last year, filed for bankruptcy a month ago and now owes the firm $43,000.
Will quarterly reports suffice rather than monthly? The managing partner and management committee must—repeat, must—understand fully the derivation of all of the numbers in any financial report. The managing partner and the management committee must be able to respond to questions on the spot. Not being able to respond immediately and cogently undermines the credibility of any reports. They must also be available to discuss the reports in detail privately.
Which financial reports are really important? That’s a big question! The answer depends on the type of practice, time of year, level of detail and simple preference. Any law firm, even solos, should (must?) at least have a time and billing software application. It will make time entry more convenient and speed the preparation of billings.
Just as importantly, any time and billing software application produces reports. Unfortunately, you did not design those reports, and they may not meet your specific needs. Sometimes these reports produce far too much detail. A common problem is repetitive reporting of de minimis or otherwise unhelpful data for people no longer at the firm. I think of these reports as base data that I then enter into a spreadsheet that makes sense to me and, more importantly, makes sense to other lawyers. Is this more work? Sure is. In my experience, taking the time to produce the most meaningful reports is worthwhile, especially reports that reduce misleading or extraneous information.
Once you have the reports that you believe relevant, consider the next level: trend analysis. I described a $50,000 client payment earlier, but that payment would likely be an outlier and certainly will distort a given month’s results. Moving averages are easy ways to smooth these spikes in the data and to better view where the firm is “trending.” Another question arises: What about using graphics, such as charts? These have their place but usually require an explanation. Many people are not used to deriving meaningful information from graphical data presentations or may even be suspicious of their implications.
So, what numbers should staff see? Firms vary greatly here—from sharing nothing to sharing too much information that is extremely difficult to interpret. I believe that staff is owed some sense of how the firm is doing. After all, they will know in some sense that things are up or down anyway. Graphics such as pie charts or trend lines comparing last year and this year can be useful. Help the staff understand that any law firm has ups and downs—that variance is normal. If the numbers are trending down a bit, describe major new clients and victories on behalf of the firm’s clients. Stress the importance of good new-client screening (i.e., their ability to pay), for obtaining signed fee agreements and deposit checks, for getting time input sooner than later and for watching closely those client amounts owed to the firm. Staff can play the role of watchdog.
While not a focus of this article, qualitative factors in a lawyer’s practice can be equal to or greater in value than the bare numbers. Acknowledge this fact often. However, ignoring the numbers excuses accountability. It is extremely important to gain consensus for intelligible and nonthreatening financial information. The tools are there.