The financial health of your law firm or any business is ultimately dependent on three simple concepts:
- Getting the work (selling your product – yes, you are a salesperson disguised as a lawyer))
- Doing the work (building the product)
- Getting paid for the work (collecting the money)
You need to keep a steady flow in all three components and monitor your results to make sure your business is financially healthy. Envision a pipeline with a steady flow of water. At any point in the pipe when the source of the water slows down, a clog occurs in the pipe or even a leak, the output will be affected. All 3 have to work together in order to keep a steady flow.
Keeping an eye on the flow is essential to making sure you are maintaining a profitable business. But in addition to keeping an eye on things, the ability to measure the flow is an important metric for profitability. For law firms, one key metric is something referred to as realization and there are two types of realization rates that come into play in the financial management of a law firm: Billing Realization and Collection Realization. Both of these metrics affect the amount of water that is getting through your pipeline.
Gwynne Monahan recently published an article that discussed the concept of Big Data and how the accessibility and collection of data has evolved with the growth of cloud based technology. The truth of the matter is that five years ago a solo or small firm attorney simply did not have the products that are available today. So the concept of producing realization and profitability reports was simply out of the question due to the lack of data collected to compile meaningful reports and the amount of time it would take to sift through the data if it was being collected.
Collection Realization Rates
I am going to start with the end in mind and talk about collection realization rates and how to mine this data to track and measure your firm’s collection realization rates, revenue and profitability. Your ability to collect what you billed is not only a financial indicator but quite often it is a measurement of your client’s satisfaction with the work product. So at the heart of it, the collection realization rate and the rate of payment is a direct correlation to your client’s level of satisfaction and your profitability. Happy clients pay their bills.
A side note: you can increase your revenue but if you are spending at the same rate you are increasing, the increase in profitability will not be there. Focus on the overall health of your firm by increasing realization rates and monitoring expenses.
The collection realization rate is the simplest of realization rates to calculate. Just what is it and how do you use Clio to calculate and track this rate?
Your collection realization rate is the percentage of your billed fees which are actually collected.
Billed Fees/Collected Fees = Collection Realization
Once a bill is sent out using Clio’s new billing workflow, there are three possible outcomes:
- The bills gets paid in full in one payment or over time (100% collection realization)
- The bill gets partially paid with eventually a write off of the unpaid balance (Less than 100% collection realization)
- The bill never gets paid and it is a total write off (0% collection realization rate)