What are the key financial drivers for a law firm? Profit and Cash!
What is Profit? Profit will be fees less the cost of getting the work done and the administrative costs of the business. For example this will include salaries, rent, insurance, telephone, bills etc.
But Cash is King.
Cash is crucial to the survival of a law firm (and any business). “Cash” will only be what a law firm holds in their office account and all monies that they hold in their client account they hold for their clients.
What can you do? Time-Recording
At any stage in your career with a law firm what you do as a “Fee Earner” will affect both profit and cash as the work you do will translate into bills. You will carry out chargeable work and record your chargeable time to give a number of chargeable hours worked on a file/matter. The firm will then bill for the work you are carried out. Most firms will give their fee earners chargeable hour targets.
Whether their fee earners are making their target can give them an indication of how well the are doing as a firm at any given time (which is why you get constantly reminded to record/post and close your time). It can also help them cost work and identify areas where they might need more support, or need to improve efficiency.
Many firms also warn against “double-discounting” where fee earners give a discount by not recording all their time on a particular matter and the client gets a “discount” at this stage and when the bill is agreed with the partner. If the time isn’t recorded, it doesn’t convert into WIP and it can never get billed.
However, having a true and accurate record of the time spent on a piece of work allows your law firm to:
- correctly bill clients for time-spent on the job (and highlight added-value);
- correctly quote for fixed fee work / or when assessing when to pitch or accept a job at set fees;
- manage their clients expectations in respect of costs and hours spent;
- allocate work and / or spread work across different levels of fee earners.
What can you do? Lockup
Often a problem-area for law firms is a high-level of lock up. Lock up is cash that is held up in Work in Progress (WIP), disbursements and debtors. i.e. money that is yours but you haven’t got it yet. If a firm has too much lock up they will need more cash (loan, overdraft etc).
Therefore as a fee earner it is important that you contribute where you can. Examples might be:
- monitoring your WIP and keeping the client informed.
- improving your personal billing and engaging in the process. In some firms/departments this is done by partners, but it should be (and is in many firms) encouraged throughout your career, regardless of level.
- regular billing is key – raise your invoices. You can’t get a debtor until you have a bill/invoice.
- discussing fees with your client (e.g. seeking to increase fees where out of scope work undertaken)
- discussing billing arrangements with your client (e.g. when and how often you invoice, whether you get money up front etc)
What can you do? Understand (get training) in your law firm monitoring process
Most firms measure / monitor a wide range of things which feeds into their overall finance model. For example they are like to look at:
- the number of matters and monitor the new of new instructions they are receiving.
- time-recording (as mentioned above).
- WIP – both from an overall perspective and on a matter-by-matter basis.
- Invoicing
- Debtors / Debt Recovery
Understand what processes your firm has in place to help you (and what they expect of you).
Finally, as a reminder keeping your time recording up to date, posting it on time and making sure it is accurate are all your responsibility. Master these and you are well on your way.