Finance

This Finance column often discusses a law firm’s revenue rather than costs. This is because revenue and the methods for how to manage revenue are common to all law firms regardless of their size, but what about costs? Of course, costs are common to all law firms. But the types of costs and the analysis of these costs vary as the firm grows and the cost structure changes. Do not fall into thinking you can simply cut costs to ensure the success of your law firm. Revenue is the more important factor to manage for financial success. Nonetheless, let’s take a look at costs.

Costs can be further defined by whether the cost is fixed (unchanging), variable (changes based on revenue), direct (related directly to revenue), indirect (irrespective of revenue), overhead (facilities), discretionary (can be dropped without impact to operations), etc. Solo and small law firms usually have a cost structure that is limited to what is necessary for keeping their doors open. These costs include rent, payroll, various insurances, utilities and office services such as equipment leases, custodial services, web services, etc. What can I tell you to do better with these types of costs? Not much because these costs are largely fixed.

Ideas for Cost Savings

Managing the revenue is the key for your firm’s financial success. But keeping an eye on the costs is an important duty of both your bookkeeper and you. Here are some possible cost-saving ideas:

• Plan in-house CLEs with speakers who might be certified public accountants, professional liability insurance agents, computer consultants or other professionals. There may also be savings in registration fees, travel time and lost billable hours. And might a client or two be invited depending on the topic?
• Your firm should have and enforce a policy of who can authorize a major cost.
• Budget and monitor closely the costs associated with business development. These are necessary costs but can assume a life of their own.
• Enforce prior approval of staff overtime and the use of temporary staff.
• Ask your staff to suggest ideas for cost savings and offer a cash payment if the savings exceed a certain amount.
• Thinking ahead, hiring a paralegal may be a more cost-effective choice than hiring an associate.
• If your postage meter went on a rampage and applied dollars rather than cents to each envelope, file for a refund using PS Form 3533.
• Consider assessing which office equipment can be turned off overnight. Color-code with a label the equipment that must be left on. This may measurably reduce your electricity bill, especially over three-day weekends.

Larger law firms take on added and often discretionary costs as they grow. In my experience preparing law firm budgets, I prepared a separate list of discretionary costs that could be reduced or eliminated without harming the firm’s ability to provide top-notch legal services. My firm was paying $50 a week for fresh flowers delivered to the reception area in a beautiful changing vase each week. That weekly amount equals $2,600 a year. I suggested commissioning a good quality arrangement of artificial flowers that would require only periodic dusting! I was even okay with two such arrangements with which to alternate periodically. My managing partner said there were too many partners in our firm who believed their clients noticed and appreciated the fresh flowers. I enjoy fresh flowers too! Who doesn’t? But are they really noticed by clients who have a lot of other matters on their minds? I gave up that battle but continued to provide such a discretionary cost listing each budget season because I wanted the partners to be confident the firm was not taking certain costs “for granted.”

The Cost of Costs

Ask your bookkeeper to prepare a report describing the total costs of the firm. Deduct total lawyer compensation (salary, benefits and retirement plan contributions) and express that net total as a percentage of total revenue. That should be under 50 percent. Also take these total net costs and divide by the number of lawyers. Do these calculations going back several years. Hopefully the trend is positive, or at least stable. Be sure to omit client file costs such as filing fees, expert witness costs and so forth. These costs are advances payable by the client.

Do not charge clients for small amounts of overhead costs such as for copies and faxes. Have clients ever told you they were charged for a soda they enjoyed in a lawyer’s office? I know of this happening! As an alternative to such individual charges, your jurisdiction may allow assessing a flat percentage of fees to recoup such costs. I am okay with that as long as that charge is described in your fee agreements.

No Excuse For Not Having a Budget

With this issue of Law Practice, I hope you are reviewing your firm’s financial performance for the first quarter of 2019. When you budgeted the costs for 2019, it was largely an exercise in repetition of the costs from 2018 because the major fixed (overhead) costs do not change much. It’s a good idea to add a margin in the budget for cost increases, whether or not you are aware of any possible cost increases. But wait, if you do not presently have a budget, no problem. Look over the expense account balances for 2018 and bring those ending balances over as the budget for 2019. Adjust any balances that likely will be different.

A Monster to Avoid

As I write this column in late 2018, not too distant from Halloween, I’m reminded of a monster I call a “cost demon” that you must ward off at all costs (pun intended!). The monster’s name is “embezzlement.” Your firm is suffering a potentially major cost if an employee is stealing funds from your operating and/or trust account. Ensure proper safeguards are in place. Ask your certified public accountant or contact the Association of Certified Fraud Examiners for resources.

Then be sure to smell the fresh flowers—if your firm has them!