Finance

Now is the time of year when many of your clients pay their accounts and take the tax deduction. So you monitor the till much more closely! It has been a good year, and you are confident your fee revenue will exceed the total for 2017. But wait, what about the prospects of a better 2019? Fiscal year 2018 is largely unchangeable history. So now is the time to start to think about 2019 and the several factors that may influence fee revenue.

But First, Command and Control

That is the purpose of a budget. If you are presently without a budget, use the fiscal 2018 actual expense amounts for the budgeted amounts in 2019. Include any needed tweaks. Reduce the number of accounts to avoid small amounts in too many accounts. Budget those smaller amounts on a spreadsheet but combine them in a larger reported account such as Office Expenses. Less detail yields more meaning. You want to easily know both the major overhead costs and the profit of the firm before partner compensation. Partner compensation includes fringe benefits, retirement plan contributions and discretionary income. If you are comparing your firm to a survey of law firms, deduct all lawyer compensation for comparability as differing partner/associate ratios among firms distort profit comparisons.

With your budget in place, you can easily see the differences between actual expenses and the budgeted amounts. That may give rise to a question or two for your bookkeeper to answer. Better yet, have your bookkeeper give you a brief report each month that describes the reasons for any major differences before you need to ask. Your watchful eye on the expenses is necessary, but your ongoing management challenge is the fee revenue. How is it best to budget the fee revenue?

Having the Capacity to Understand Capacity

Think of the fee revenue as the “capacity” of the firm. Portray all of your timekeepers as though they will work, bill and collect a maximum amount of fee revenue in the upcoming year. “Maximum amount” includes certain assumptions, such as working full time (or not), a billing rate per hour, a number of hours worked, of which 100 percent is billed and 100 percent is collected. Stay with me on this!

Your firm will likely miss meeting the capacity goal I describe. The shortfall is to be expected. The point is to understand what is potentially possible and to strive to narrow the shortfall. Your budget for fee revenue is as high a percentage as possible of the revenue capacity of the firm. You and your partners are the judges of that percentage.

The 'Aha' Moment

With capacity identified and the estimated fee revenue budget derived from capacity, you are released from the limitation of what the firm did last year and hoping only for an improvement over last year for the coming year. Discard that year-over-year rationale and focus on the theoretical fee revenue capacity of the firm.

Take the discussion of capacity into your year-end partners meeting. Reassure the partners you understand the capacity goal is indeed lofty and no one will be penalized for failing to meet the goal. Indeed, you will present the 2019 fee revenue budget as a lower estimate than capacity. This approach is a better way to manage the revenue and has the potential to motivate the partners in ways that were missing in the past.

Romancing the Revenue

The romance with the revenue starts with when the partners say yes to each new client and matter. Are the partners using similar criteria for accepting new clients? How are the matters priced? Who will work on the matters? Can the client pay the legal bills? Are there any clients needing to be fired? I met a lawyer recently who told me that each year he asks his secretary to list five clients who should be fired. And he fires them!

Yes, uncertainty abounds, which is why you must actively manage this annually emerging fee revenue picture. Using the reports from your time and billing software, you can easily see the value of the time recorded, billed and paid (and when). Influencing factors include the number of timekeepers, maturing contingent fee matters, realization (i.e., the percentage of fees billed and fees collected) and timely collections.

I Don't Want to Be In a Horse Race

How you distribute the reports of each month’s results matters. How widely distributed are the reports? How well understood are they? Are they read by the managing partner only? The executive committee only? The partners only? All the lawyers? Are only the partners portrayed (i.e., the horse race), or is the data describing only the recipient’s financial performance? The answers will vary based on your firm’s culture and preferences.

Quarter 1, 2019, Here We Come

I’ve said in past Finance columns that your bookkeeper worries about the cash balance in the first quarter because of the large distribution of profit at year-end. Plan for the cash needs of the firm without relying on the line of credit. The partnership agreement may describe a limit on the year-end profit distribution.

Now you are ready to face 2019 with confidence and, hopefully, enthusiasm!