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November/December 2019


New Ways (Perhaps) to Think Financially

Peter Roberts

Don’t deny it, I can see you standing in your bookkeeper’s office perusing the mail for any checks from your clients, particularly those clients who catch up their accounts in December each year. And those electronic payments are also very nice to see this time of year. Any chance of meeting your revenue budget? Any chance of surpassing last year?

These thoughts are typical and understandable, but I want to offer a few other ways to think about your numbers.

New Way to Think No. 1: Understand discretionary and nondiscretionary expenses.

In my experience assisting solo practitioners and small firms, I rarely encounter a budget for either revenue or expenses. Yet I have always thought that lawyers want to be in control. A budget helps you to be in control. Your bookkeeper is the person to prepare the budget to help you to better understand the financial performance of your firm, particularly the control of expenses. 

For the budget in 2020, simply use the nonpayroll costs for 2019. Payroll needs tweaking for growth, shrinkage or changes in pay scales and related costs such as fringe benefits and payroll taxes. Of course, certain expenses, such as rent or equipment leases, may have escalator clauses. Ask your bookkeeper to prepare a list of expenses that could be eliminated without affecting productivity (discretionary expenses). An example is fresh flowers each week in the reception area. How much over $5,000 is the total?

New Way to Think No. 2: Forget last year.

But it is the revenue side I really want to focus on. This is where the real financial action is because each time you accept a new matter you affect your firm’s revenue in either an immediate way or certainly in the future. Let’s look at a different way to budget revenue.

If you budget revenue by adding a percentage growth factor to last year, think again. Instead, list your timekeepers and their billing rates. Then assign an hours total for the upcoming year to each name based on whether the person is full time, part time or due to take a sabbatical. Multiply the hours by the respective rate for each timekeeper.

The grand total yields the “capacity” of the firm, assuming the work is there. Now look at 2019 individual revenue numbers. Calculate the percentage shortfall from the capacity for each timekeeper. Hopefully, the percentages are 90 percent or above. But let’s say the percentages average 78 percent. Your budget for 2020 will be ... 83 percent of capacity. Your focus each year becomes narrowing the gap in reaching capacity while understanding, for excellent reasons, that you may never reach 100 percent of capacity. Even if your firm is 100 percent contingent fee, use this approach to measure who indeed is realizing above 100 percent of the capacity of the attorneys working full time, or about 1,800 hours a year, at a nominal rate, say $300 an hour, for a capacity of $540,000.

New Way to Think No. 3: Use a billing budget.

If your firm is largely contingent fee, skip this section of the column.

How much should each attorney bill each month? I know, I know, “as much as possible!” But let’s consider using a standard by which to measure billing performance.

The standard for each month is derived as follows:

January’s billing budget equals one-third of the value of that attorney’s work-in-process (unbilled time value) at Dec. 31. February and following months are derived by taking the value at the end of the prior prior (not a typo) month, adding new unbilled time and deducting last month’s billing budget (not actual billings).

Here we go:

December’s total work-in-process: $58,000.

One-third of $58,000: $19,314 is January’s billing budget.

February’s billing budget is $58,000 plus new work-in-process of, say, $12,322 minus $19,314 times one-third, or $16,986. The report for attorney Gonzalez for the first quarter is reflected in Figure 1.

One law firm used this report to base interim profit distributions during the year to those partners who exceeded their respective billing budgets at the selected point in time. Think about how your partners may react to such a report, particularly if their compensation is affected. Attorney Gonzalez is behind budget by $6,708 after the first quarter.

New Way to Think No. 4: Use the pipeline report.

I love the pipeline report. The report lays bare the beating heart of the revenue generation of the firm. Take a look at Figure 2.

Is it a horse race?

As you can see, each attorney is compared to the other attorney and to himself or herself for the prior year. If you are using this report now, I heartily congratulate you. If you are not using it, set up a spreadsheet and fill in the respective numbers for 2019. But keep it to yourself for now. I admit to a bias of caution when introducing a new format for reporting individual financial performance. Watch the numbers over a period of time to become comfortable with them. Be prepared to hear, “I don’t want to be in a horse race. Just give me my own numbers.” Comply with a smile.

So, my title for this column includes the word “perhaps” because you may not have learned anything new. I welcome your comments about what I have described in this column. I also welcome your ideas for financial topics in 2020.

Peter Roberts

Peter Roberts is a private practice management consultant for lawyers. He was the former practice management advisor in the Law Office Management Assistance Program of the Washington State Bar Association for 13 years. He is active in the ABA Law Practice Division and is serving this year as the chair of the Law Firm Finance Committee. [email protected]