The 6 Month Financial Checkup: Are you making money yet?

Law firm ProfitabilityThis article was originally written for Attorney at Work in 2014. It has been re-written and updated for this blog post.

So it’s July and you will be sitting down to reconcile your bank accounts for June’s activity. This is an exercise you do (should be doing) every month. As long as there’s money in the checking account, life must be good – right? Maybe, but it begs the question – How profitable is your law firm and can it be doing better?

Six months are in the books and now is a good time to evaluate a few of your firm’s financial metrics and law firm profitability before you plow through the next 6 months of the year. Step back and review where you are in relation to your 2016 budget you created in January. Are you profitable and making money yet? If you never created that budget, no worries, this article will help you plan for the next six months with a budget and a system in place. I have included a sample budget tracker spreadsheet for you to start with now.

While looking at the financial data and key metrics you should be tracking and measuring, let’s ask a few questions to get you in the mindset of looking at your firm as a business and preparing for a more successful next six months.

  1. Are you paying yourself a monthly salary and is it enough to cover your personal expenses? Or are you randomly taking money out of the business when the bank account looks healthy enough to do so?Payroll

Goal: Build you salary into your budget along with payroll taxes. It is tempting to just randomly take out money but the tax implications for this habit will catch up with you the next year. This task also requires you to create a personal budget so you know how much salary you and your family need in order to pay the monthly bills and save for your kids college!

  1. Do you know what you have to bill and collect every month to cover your firm’s monthly expenses, which includes your salary? This is your monthly “nut” – the money you will need very month to pay fixed expenses. Know your “nut” assumes you know your monthly fixed expense.

Goal: Calculate your “monthly nut.” Put this number in a very visible place so you look at it every month as a reminder that once you hit this number, you are making profit for your family and your future retirement.

  1. Does your budgeted income number reflect your collection realization rate?

If you budget to bill 1500 hours/year at $200/hour, your budgeted revenue is $300,000. But it’s not a perfect world and this is not what will be collected. Knowing your collection realization rates will help you set a realistic revenue number to drive your budget.

Collection Rate

Goal: Calculate your YTD 2016 collection realization rate. Shocked at how low it might be? A collection realization rate of 90% should be an attainable goal for you. If it seems daunting based on how low your current collection rate is, don’t worry. This is one area of your financial dashboard that you can improve upon by changing billing habits and tracking accounts receivable.

  1. Do you know your year-to-date profit or lose? How are your actual numbers compared to what you budgeted for? A profit and lose statement is sometimes referred to as an income statement. It is simply an accounting report comparing revenue/income to expenses, usually shown monthly compared to last month for the same time period.

Income is based on a few things discussed above: billing and collections. Expenses are something that can surprise you if you are not tracking them monthly. Having the prepared budget you review each month is invaluable for tracking expenses. You may not think you are spending a lot of money until you see it in writing.

Profit lose

Goal: Make sure your accounting system is setup with a chart of accounts that segregates expenses by categories that you wish to track. Then every month enter the actual amounts spent and watch for any unusual trends. If one month was higher than usual, adjust for the remaining months so you don’t overspend.

  1. Do you have a cash flow report that you can look at every month?

A cash flow report is simply a way for you to keep an eye on your actual checking account balance. If you are reconciling every month and updating your budget/financial tracker spreadsheet, then you will know how much you are starting with every month – with enough money in the checking account or not enough. Once again, it gives you data to make decisions about your business so you can be proactive and not reactive.

In the sample budget tracker/financial spreadsheet, the beginning cash balance for the next month is calculated this way:

2016-07-13_21-21-03

 

 

 

 

Goal: Commit to reconciling your bank accounts within the first few days of each month and updating your budget/financial tracker spreadsheet with the reconciled amount. Having correct and current data is essential for making good business decisions.

Cash Flow

  1. How many hours and dollars are you billing each month and what is your average hourly rate?

You can’t get paid unless you are billing every month. Knowing how much you are billing every month and what the trends are will help you see your financial future, not through rosy glasses but actual numbers.

Goal: Track your billable hours and bill promptly and regularly. Train your clients to expect to pay monthly for their legal services.

Hours billed

  1. How many new matters are you setting up each month and what has been the trend? Is the pipeline full for continued cash flow? Do you have an even balance of hourly vs. flat fee vs. contingent?

Goal: Track the number of new matters per month and visualize the growth. A month with a low number of new matters can signal less income in the coming months. Especially combined with a low beginning check register balance. Knowing this ahead of time can help you prepare. Maybe look at expenses closely over these upcoming months and defer expenses if possible.

Matters

  1. What is your six-month collection realization rate? Is this a weak spot and a reason for low revenue numbers? Your collection realization rate is the percentage of your billed fees that is actually collected. Pretty simple stuff. Collection realization rates are often overstated because lawyers tend to leave uncollectible receivables in the system for an unrealistic time period, rather than admit the money will never be collected.

Goal: Commit to calculating your six-month collection realization rate and for the remainder of the year, set a goal to increase this by 2%. An increase of 2% can yield additional money without doing more work.

Collection reallization

  1. What are your outstanding accounts receivable 30, 60, 90 and over 90 days? This is an area that can yield additional profit for your firm, without putting in longer hours, by simply tighten up or putting in place good receivable management practices. You are not in the business to extend credit and make loans. Set expectations with your clients’ early on regarding payment of invoices. You are a small business owner and cash flow is important. They should understand and respect your business needs. If they don’t, fire them.

Goal: Implement monthly billing procedures and collect all payments before they hit 90 days past due. Create a procedure to send letters requesting payments once account hits 60 days past due and then follow-up regularly. Analysis past due accounts in excess of 1 year. They have little chance of being collected. So don’t count on this money coming in. Write if off and move on.

AR

  1. Don’t have a budget or method to track your firm’s financial data? Use the summer month of July to build yourself a nice spreadsheet so you are ready for the next six months in 2016. This is an invaluable exercise and once done, it easily converts to an annual worksheet.

Improved understanding of these financial metrics will assist you greatly with strategic business development initiatives–all of which are critical to remaining competitive and profitable as a solo and small firm attorney.

Written by Peggy Gruenke with CPN-Legal, a company whose mission is to help solo and small-firm lawyers build better businesses. She is active in the ABA GPSolo Division and a frequent speaker at bar associations and ABA TechShow.

5 Checklists to add efficiency to your practice

Originally published in Attorney at Work

checkmark-fbProcesses are the means by which we get things done and checklists are a great tool for helping you get these processes completed. Within your business, there are many things which you do repeatedly. The purpose of documenting what you do is to make sure it gets done correctly, improve upon it and do it more efficiently. That’s why pilots, surgeons, and astronauts use them extensively. For solos, creating these simple checklists helps you stay on top of what needs to get done without worrying that you forgot something important.

When you set-up a new client file, file a bankruptcy, or end a case, you do so using processes, which are most likely in your head and may not be well documented. So let’s get some of these processes out of your head and on paper (or use one of the handy checklist apps)!

Conflict-Checking

To help avoid a potential malpractice claim. To effectively analyze conflicts, you need to have in place a conflict-checking procedure. The ethics rules in some jurisdictions require law firms to maintain a conflict checking system and to have a policy in place.

For solos, I think setting up a simple Conflict Checking Checklist and documenting you used it is a sufficient process to have in place. Even in very small or solo firms, you should not rely on your memory to determine whether you have a conflict. Detecting a conflict after the representation has started may harm the client and your reputation. Plus, it creates extra work – like having to refund that retainer payment you already deposited.

Below is a sample checklist created using Evernote. Of course, you could choose to add more details, such as the location of the files to be searched, will you search open as well as closed files, and what will be searched: emails, the document server, and/or the contact database.

Checklist for conflict checking 2015 

New Client File Setup

A process, hopefully, you perform on a very regular basis. Quite frankly, it is very administrative and can be time-consuming. So grab your pencil and start writing down, step-by-step, how you step up a new client file. Then flush it out, re-write it and lastly, commit it to paper by creating the checklist. This way you’ll be ready to delegate this administrative task as soon as you can afford to do so.

Receiving a Retainer

Every lawyer knows mismanaging a trust account (IOLTA) can have terrible consequences. So creating a checklist to ensure you are properly depositing a retainer is a good idea. And in this article “Would You Pass a Trust Account Audit”,  I review in more detail the trust accounting process. For this checklist, let’s make sure you are processing that initial receipt of retainer correctly.

 Checklist for conflict checking

Month-end Accounting

To keep your eyes on the business side of your practice. This process will include some of the below steps:

  • Make sure all monthly expenses and payments received have been recorded
  • Reconcile your operating and trust accounts
  • Sign-off on reconciled reports (especially trust if you have delegated this task to someone else)
  • Review key financial and performance metrics
  • Monthly and YTD Profit and Loss reports (did you make money?)
  • Past Due invoices
  • IOLTA Balances by Client
  • Number of new clients/matters this month
  • Update cash flow analysis spreadsheet
  • Give yourself a raise!

Closing a Matter

For keeping in compliance with client documents retention rules. Another frequently occurring task – you complete a case. Then what? They are rules you need to follow and things you’ll want to do when closing a matter. Such as:

  • Advising client the case is complete and any next steps on their part
  • Retaining client documents for the required time period
  • Returning original documents to the client
  • Asking for referrals and repeat business (ask your client to leave a review on one of your online profile sites)
  • Reminding the client they still owe you money

Bonus: Advantages of creating these checklists are:

  • They become a risk management tool and you now have the start of a risk management policy manual (which malpractice insurers love)
  • You will save time
  • It will lead to better ways of getting things done
  • You are building the foundation for growing your practice
  • You’ll sleep better knowing these things are consistently done right

 

 

 

 

Implementing project management in your firm: A few tips to guide you

Project Management Flow ChartMarch 2, 2015 | Peggy Gruenke | Practice Management Consultant | ABA Legal TechShow Speaker 2015

Project Management = Matter Management

Project Management is quite the buzzword these days. The ABA recently published a new book, The Power of Legal Project Management, which has resulted in a number of articles and new CLE programs related to this topic. Legal Project Management is a very broad and deep topic, (the book has 517 pages!), the focus of this article is to create the mindset that legal project management is nothing more that matter management. I’ll explain the basic components of matter management and how it can bring a competitive advantage to your firm.

While Legal Project Management (LPM) has been adopted by most larger firms, a new trend is developing where smaller firms are looking to improve profitability, billing realizations and gain a competitive advantage by designing and using matter management tools. The practice areas best fit for project management are litigation cases and even larger transactional cases. Over the next 5 to 10 years, matter management tools will become a normal way of doing business just like today, how client intake and fee agreements are part of every current law firms’ tool bucket.

At the basic level, matter management involves defining, planning, executing and evaluating. The reason it is growing rapidly, is it can be a competitive advantage in the following areas:

  • Enhance current client relationships by showing them your proactive approach to handling their matters
  • It provides a better way to monitor fees and costs
  • Improve communication with clients and eliminate surprises
  • Deliver greater value to clients by reducing clients’ total legal costs
  • Reduce the average cost of certain types of cases through the development of processes
  • Manage and share the risk
  • Increase profitability and realization rates
  • Improves financial reporting because you are capturing more and better data – key metrics
  • Develop better internal business practices and increase efficiency
  • Build good processes to increase productivity
  • Gain a better understanding of how you are getting things done

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Clio Turns Tasks into Processes: Sample Settlement Process

Dec 9, 2014 By Peggy Gruenke, Certified Clio Consultant and Xero Certified

This year, Clio introduced a new way to do tasks which, coupled with the Gmail integration, has pretty much brought a whole new level of organization, efficiency and productivity to getting work done with Clio. Task management was an area Clio needed to give a facelift and the Clio team gave it more than just a facelift. Clio’s new smart, cascading tasks feature saves you a lot of time, knowing exactly what you need to do with each new matter or milestone within a matter instead of having to create the same tasks every time.

Now you can turn all those well-written processes you have in your firm manual into auto generated processes and tasks. Sounds a bit like project management. Here is a sample of setting up a settlement process using Clio’s cascading tasks,  managing how it gets done, when it gets done and who will be doing it. Managing the resources, the time and the workflow.

There are certain types of funds that require special handling. Settlement funds fall into this category. There are ethical duties a law firm must adhere to when handling such funds. Clio has great tools to help you manage client settlement funds. These tools ensure proper accounting procedures are followed and the transactions are correctly recorded in the client trust account.

When processing settlement transactions, there are usually many pieces of the puzzle that need to fit together in the right sequence and with the correct calculations. The more you can automate this process, the less chance for errors. This article will illustrate how to use Clio to correctly and efficiently process settlements using two Clio features:

  1. Document templates with custom fields
  2. Task Templates and Cascading Tasks

1. Creating a Settlement Worksheet Document Template

For complete details on how to create and upload an Excel document template, here is a link to a Clio support article.

The settlement worksheet includes defining matter custom level fields and creating a matter custom field set. From the Settings/Custom Fields, add the following matter level custom fields:

  • Settlement Offer Amount (Type = Money)
  • % of Settlement for Attorney Fees (Type = Integer)
  • Settlement Check Amount (Type = Money)
  • Settlement Check # (Type = One Line Text)

Then create a custom field set called Settlement Fields and include the above fields in this custom set.

custom fields settlement 1

Create the template with Clio form field names and upload the Excel template to the Clio Documents/Template. The template will look like this; note the color-coded key regarding fields.

custom fields settlement 2

 

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Focus on managing processes, not managing time

October, 2014 By: Peggy Gruenke | Law Firm Practice Management Specialist | Gold Level Clio Certified

Recently, I participated in an interview with the folks from The Form Tool on “How can the Legal Industry Improve Efficiency?” The discussion took me down the path of looking closer at the concept of time management verse productivity.

I think there has been a shift away from the phrase “time management” to a focus on productivity and processes. If you look at time as something to be managed, it can become a productivity constraint. You are always looking for the next new way to file and label things to help you get it all done. The truth is you can’t get it all done. You are a limited resource. There will always be more to do, more tasks to add to your list. And as a lawyer, building a business, you hope that the tasks never run out because that would be a bad sign.

Get more strategic and intentional

Being able to recognize you can’t get it all done can be very empowering because it demands you become more strategic and intentional about what you are going to do and how you are going to do it. The focus shifts from managing your time towards examining the “why” and “how” things will get done.

  • Why are you doing the task: is it something only you can do and will it add value?
  • How will you do it: do you have an efficient process in place?

This shift forces you to look at your to-do-list with the intention of prioritizing and taking action. Out of the desire to get more done, your actions will lead to developing and creating efficient processes.

As you identify activities that have the highest value and are the best use of your time and then build good processes, you will be more productive not because you managed your time better, but because you chose better and acted with purpose.

Your ability, everyday, to determine and act upon your most important tasks and get them done quickly, because you have have good processes in place, will have more of an impact on your productivity and success than trying to manage your time.

Peggy Gruenke | Clio Certified Consultant | Law Practice Management