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.

Is 2015 going to be a profitable year? Key Metrics to Track

January 2015 | Peggy Gruenke | Clio and Law Practice Management Consultant

Business Plans for Solos

Key Metrics to Review for Profitability

Now let’s look at different key metrics you may want to review and have in place for 2015. Understanding which key metrics you should be tracking and measuring is critical to remaining profitable as a solo and small firm attorney.

Using the below chart as a reference, here are six key metrics you should track for 2015. If you think six is too many to identify and track, then pick three. If you have never setup a way to track and review these key metrics, this spreadsheet will help you get started.

  1. Track the number of new matters you are getting by type: flat fee, hourly, contingent and pro bono
  2. Track number of hours you are billing on hourly cases and flat fee cases
  3. Your average hourly rate on billed matters
  4. How much you collected each month (revenue from cash flow worksheet)
  5. Your collection realization rate: what % of billed revenue did you collect
  6. Money not coming in: How much money are you leaving on the table every month

Money In Money Out - Preparing for 2015 Image Key Metrics

  1. New matter tracking. How many new matters did you set up each month and what has been the trend? Did the pipeline stay full for continued cash flow? If you have good law practice management software, this information will be right at your fingertips by running reports.

One thing you want to look at is the balance between your types of cases. Too many contingent cases will create very uneven collections since these cases have a long life. They also have expenses related to them. Hourly cases should be generating a nice flow of income as long as you are billing regularly. If you do a number of flat fee cases, it’s important to make sure you are not only profitable but you are profitable at a decent hourly billing rate. Flat fees also mean you may have to manage the flow of this money between your trust account and your operating account, creating invoices and paying yourself at certain milestones. Pro bono cases should be one of you yearly goals as part of your business development plan.

Tip: If you do a lot of contingent cases and find your monthly cash flow having too many valleys, open up a firm savings account and deposit a portion of your next contingent fee in this account. Move it over to your checking account as needed to cover your monthly “nut.” Continue reading

Is 2015 going to be a profitable year? Part One

January 2015 | Peggy Gruenke | Clio and Law Practice Management Consultant

Business Plans for Solos

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 2014law 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:

  1. 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.
  2. 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.

Money In Money Out - Preparing for 2015 Image #1 Continue reading