This issue I offer several ideas for taking a 30,000-foot financial view of your law practice. Have you ever set aside time just to think about your practice and goals? For most people, the answer is usually no. Instead, I hear, “I have practiced for over 20 years, and I seem never to know if I can meet all of my financial obligations each month.” Is this you? Such a concern may require placing a photograph on your desk of the people most important to you—to remind you not to ignore financial reality.
Consider my “$150,000 rule.” I believe that it is very possible to receive gross fees from your clients in the annual amount of $150,000. (You should be paying yourself 70 to 80 percent of this amount if you don’t have staff, or paying yourself about 50 to 60 percent if you do have staff.) If your hourly rate is $150, you must collect 1,000 hours to realize $150,000, or $12,500 per month. As we all know, lawyers must work a number of hours over 1,000 to achieve a net collected amount because you may not be able to bill or collect all of the time that you work.
PICK A NUMBER
Pick a number, any number. Let’s use 1,200 hours of work required to collect 1,000 hours of time. But how many hours do you bring for the benefit of clients if you are practicing full time? I would say about 1,600 hours. That number is derived by taking work hours of 2,080 (40 hours per week x 52 weeks) and deducting hours for administration, vacation, CLE attendance, pro bono work and business development, to name just a few demands on your time. As this arithmetic scheme comes into focus, you may be noting a difference between 1,600 available hours and 1,200 required hours, or 400 hours. These 400 hours imply room for higher gross fees or better work/life balance or both, with no weekend work! But of course the “back story” is that too often the clients cannot or do not pay to an extent that distorts the outcome of this arithmetic model.
WHAT’S TO BE DONE?
Let’s take a walk along a four-point financial path. Following these four points can help you to reach the $150,000 of gross fees and prosper further, particularly if your hourly rate is above $150
Budgeting. Be open-minded to any act of planning, such as budgeting. Budgeting creates the anticipation of achievement and helps to avoid surprises. Don’t know where to start? Well, you might review my column on budgeting in the May/June issue of this magazine. Then use last year’s tax return or totals from QuickBooks as this year’s budget, to have useable budget numbers immediately available. Your goal is to increase gross fees and to reduce expenses, compared with last year. Track amounts each month against the budget. It can be fun!
Using flat fees more often. You likely know more about your work than you think you do. That knowledge can help you to budget a fee for a similar scope of work. Look back at closed matters with similar fact patterns and see what the average total fees paid were. (Do not use fees billed.) The flat fee is composed of more than only rate multiplied by time. Add a premium (say, 15 or 20 percent) for the added value to the client (for certainty of the cost) and for the added financial risk to you. Go to utbms.com to see lists of the tasks that a lawyer performs. The Uniform Task-Based Management System one finds at that website is helpful to budget a matter, and it helps a client to understand the work that you do. Do not worry if you underestimate a matter. Measure your success in the aggregate. After six months or a year, see how many flat-fee matters exceeded your hourly rate (assuming you kept time records) as opposed to those that reduced your effective hourly rate. You likely will score more wins than losses. Over time, you will prepare better estimates. If the client resists the flat-fee amount, offer a payment schedule with 60 percent paid up front. If the client still resists the flat-fee amount and the scope of work cannot be changed significantly, part ways—thereby avoiding the inevitable unpaid account receivable if you had extended credit to that client.
Asking for the money. Most of us may dislike asking for money. Ask for sufficient money up front, when you have the greatest leverage with the client. Get 80 percent of the probable total fees as a fee/costs deposit. Invoice the client for the balance or replenishment of the deposit before the deposit balance reaches zero. If you must extend credit, bill routinely and monitor accounts receivable. Move away from using spreadsheets and word processors for billing, and start using a timekeeping and billing software program to reduce the time devoted to this chore while building a historical database. Consider withdrawing from matters that do not pay. A serious danger sign: accepting any new clients to obtain funds to support the work you already have.
Not giving away service yet providing value. Giving away too much service can … well, you finish the sentence. Pro bono matters are important to take, but take them with a plan and within your budget. Be rigorous when recording time, when managing time, when taking telephone calls and when billing time. If the matter cannot “take” the amount of time billed, consider asking the client to decide the amount of the write-down.
This four-point reality check may give you several ideas for mitigating the financial damage that can occur to legal practices every day. You provide important services to your clients and you also deserve to prosper.