chevron-down Created with Sketch Beta.
September/October 2019

Finance

Ruminating on Financial Content and Communication

Peter Roberts

This column concerns communicating financial information within your firm. Let’s start by laying some groundwork.

I have the privilege of speaking each year to a class of law students who are enrolled in an elective course about the business aspects of a law practice. I always ask the students to describe their undergraduate majors. If the major was business-related, I do a thumbs-up. That is because some familiarity with business concepts is much better than no familiarity at all, especially if they will someday represent business clients. I usually do not mention that they could be asked to be the leaders of their future law firm in the interest of TMI (i.e., too much information) at this early stage of their legal career.

The dinner table.

If your undergraduate major was not business-related, perhaps your family owned a business and so you were exposed to discussion at the dinner table about marketing, personnel management, competition, growth plans and financial reports. If your parent or parents are attorneys, you had a doorway to at least some of the financial questions encountered in a law practice of whatever size.

But perhaps there was never talk of money at the dinner table. The subject of money is a loaded one. Every family, indeed every person, approaches the topic of money carrying various levels of baggage. My family had been affluent and later encountered difficult times. I remember my mother cutting coupons and carefully watching what was spent each month. My father was a commercial artist, not a businessperson, so my entry into the business world was somewhat accidental based on my deciding to major in economics. Money was never discussed at the dinner table.

Dollar signs are new to me.

If the subject of money was never discussed in your home and your undergraduate degree is not in a business-related subject, you face a challenge because now you are in a law firm and exposed for the first time to the challenge of understanding important numbers with dollar signs. I sympathize with you if you are having difficulty wrapping your brain around the reports you are seeing. Let’s unpack what I am talking about.

Law firm economics.

The leadership of the law firm must be sensitive to the varying baseline knowledge attorneys have concerning law firm economics. Knowing what drives financial success is crucial to understand for all attorneys in the firm. That is especially true because the attorneys interact with the folks who pay the firm’s legal bills—the clients. Whether and when those bills are paid depends to a measurable degree on those interactions.

Data versus information.

As we know, financial software has the fearful ability to generate data at prodigious rates, and I always regret seeing this data being sent out to a firm’s partners, often without a summary page. Data are not information. Information arises from human intervention to arrange the data in a way that tells a story. That means using the relationships of certain numbers that, over time, tell the story of revenue growth and the control of expenses. Be sure to ask your bookkeeper to keep a watchful eye on the variances of actual expenses from the respective budgets for those expenses.

Financial software includes a variety of reports and data that each law firm must decide how to both use and to communicate. I believe the partners most familiar with the financial information of the firm have an obligation, over time, to introduce their knowledge to the rest of the attorneys. The word “transparency” is often heard, particularly concerning partner compensation. To me, transparency means ease of understanding, so I am not saying it means only “simple.” The concept could be more complex yet very logical to understand.

The dashboard.

This term is used in law firms to describe a summary of financial information that may even include a chart or graph. I applaud the use of such summary reports that are quick to fathom because we really only want to practice law, not spend too much time trying to understand blasted financial reports!

Less is more.

Use part of periodic staff meetings to describe the elements of the financial reporting the firm uses, but use small doses at first. And perhaps your certified public accountant might be the better presenter. But it is crucially important for everyone to understand the connection between nonfinancial activities and their relationship to financial success. In other words, whom you accept as clients, and how you treat the clients, directly affects getting paid. Your staff also should understand this concept.

Switching horses.

The recent publication of The Lawyer’s Guide to Increasing Revenue (Third Ed.) describes a wide listing of financial information and how to derive it from the underlying data. But beware of introducing any new reports to your partners during the year without adequate preparation and your own confidence the new reports say something meaningful. My upcoming column in the November/December issue of Law Practice will describe several financial reports you may not have seen before.

Content and frequency.

Ask your partners what financial information is important to them. The answers may surprise you. A partner (or partners) may say none of the information is important to them. They just want to practice law. So, what to include? I say it is all about the revenue. What exactly is work in process? How does it relate to billings? How does fee revenue relate to billings? How is it best to portray this information? How frequently? Certainly for revenue the frequency should be monthly, using year-to-date numbers. Want to include a trailing 12-month average of total revenue? Try it out. Your firm likely will be the only firm on the block doing so!

Another thought.

Be sure to share at least some of the financial information such as work in process with the associates. Gauge how they react. Those associates who really get on board with the financial information may likely become your firm’s future leaders. In the land of the blind, the one-eyed man is king. 

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 as co-chair of the Law Firm Finance Committee.