January 2015 | Peggy Gruenke | Clio and Law Practice Management Consultant
Law firms are profitable businesses
Let’s set the stage with a very positive image: Law firm business models are very profitable models. According to a Fortune magazine article, in 2014, law firms ranked second as a profitable business model with an average profit margin on 17.8%. So, yes, you can make money running a solo law firm! That doesn’t mean it’s easy to do but with the right tools in place at least you will now if you are being profitable.
So it’s January and you will be sitting down to reconcile your bank accounts for December’s activity and looking at your year revenue and expenses. 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, “Was your business profitable in 2014 and can it be doing better?”
January is a good time to step back and review the financial health of your solo or small firm business. While there are many areas to look at as you prepare for 2015, this article will discuss two areas:
- Reports you should have in place and reviewing at the end of the year and monthly to help you better understand the financials of your firm.
- Key metrics should you be reviewing to reveal weaknesses in your business. Or identify strengths and give yourself a pat on the back.
Preparing for 2015: Reports for reviewing Money In, Money Out
Money Out: Review your budget tracking worksheet which has been tracking expenses by month: actual vs. budget. This report provides a birds’ eye view of how you spent money in 2014 and compares it to your budget. For 2015, it will be your data for creating your 2015 budget.
The key thing to look at on this report:
- Where did you overspend? Maybe the extra expenditures are justified.
- What accounts never had expenses applied to them? This would be for 2 reasons:
- Maybe you created expense categories but never used them. If so, remove these accounts so the report is less cluttered and easier to read
- Maybe you have expenses allocated to the wrong accounts. You will want to fix this so you have a true picture of actual expenses.
Added bonus: If you are not currently using accounting software, this worksheet can be setup to reflect the proper way to organize your chart of accounts for that accounting system. The chart of accounts is simply a way to categorize firm expenses and income.
By Peggy Gruenke, Owner – LawBizCOO
A lawyer’s job is more than offering sound advice or making a persuasive argument. An important role for every lawyer seeking to improve their level of profitability is to manage expectations from intake through getting paid at the conclusion:
- Expectations about service;
- Expectations about how long it will take;
- Expectations about results;
- Expectations about cost and getting paid.
#4 is an active process that really is going on behind the scenes during the entire engagement. In my previous blogs, I talked about getting paid on cases using retainers and hourly billing and the importance of communication in these processes. LawBizCOO
Today, let’s talk about the clients who are habitual late payers and ask for discounted bills once the bill is beyond 90+ days. One reason you may be in this position is due to the flow of communication being driven by the client rather than you, the lawyer. By not firmly implementing your collection policy throughout the engagement, you have caused your own collection problems. A firm-wide written collection policy will set the stage for getting paid. Including this information in your fee agreement is the way to address the getting paid for your work part of the engagement. (Include link here)
So many times I see a client’s account creeping up to 60 days past due and the attorney assures me they are “good for it”, they will pay. Or “they are a good friend or a friend of a friend who will refer me more business”. The attorney continues to work on the case. Then the next month it’s 90 past due and same responses from the attorney. Now we’re six months into the engagement with no payment. You have clearly sent the message to the client that it’s OK not to pay you for the legal work you are doing on their behalf. Keep in mind, clients respect working with lawyers who have a good business sense and firmly adhere to the guidelines set in the initial client meeting. And as a small business owner, getting paid is an integral part of your business.
Clients who get no pressure to pay their late bills, generally will not pay them. Then when the attorney finally does decide he wants to get paid for the services he provided, the getting paid process becomes a time consuming effort that:
- Leads to confrontation with the client;
- Opens the door for the client to question this work;
- Is ultimately less profitable because in order to keep the client happy, you discount the bills.
Not setting and managing expectations has created an environment where the client has effectively put themselves in control of your collection policy. Take the time early in the engagement to set the stage to make this matter a profitable one.
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By Peggy Gruenke
The other day I was working on billing, accounts receivable and collections and I noticed a pattern which shed some light on our cash flow and receivables. I was able to identify 3 types of clients and how they pay their invoices.
Type 1 – The client, who paid an original retainer which has now been depleted and never replenished. Reviewing the bills of these clients, they were starting to accumulate past due balances. I had a feeling that this was happening because they somehow expected that was all they would have to pay.
Type 2 – A client who is on hourly billing without a retainer. For the most part they seemed to be paying consistently as long as the invoices were getting mailed out monthly, without big surprises like large amounts of previously unbilled time now showing up on an invoice.
Type 3 – Clients who we allowed to become late payers. Who’s in charge here? Continue reading