Measuring success by the numbers

To succeed, lawyers need to know more than the law.  They need to understand the finances of their practice to ensure profitability.

Donald D. Becker, MBA and JD, explained what lawyers need to know about financial numbers in his presentation, “Law Firm Economics: Making Sense of the Numbers,” at the Third Annual National Solo and Small Firm Conference in Santa Fe, N.M., recently.

He pointed out that there are several key financial indicators and profit drivers for firms. He also emphasized the importance of budgeting, understanding what factors contribute to firm profitability, the importance of maintaining adequate capital and the minimal financial controls a firm needs.

First of all, as ensuring income is a key concern, lawyers must take a critical look at their billing practices. Becker pointed out that billing rates multiplied by the hours worked do not always equal income—first the lawyer needs to collect. Lawyers can improve the realization of their time by billing quickly while a client is still grateful for the success of the lawyer’s efforts, avoiding discounts on the hourly rate and selecting clients who are likely to pay.

Billing, according to Becker, starts with client intake. He noted that lawyers should work with prospective clients to carefully define the parameters of the work they will do, outline their fee structure and set expectations regarding communications, availability and emergencies. Doing so will help avoid any surprises when clients get their bill.

Ensuring payment also involves client selection. Becker offered some warning signs of people to avoid, such as a potential client who is looking for revenge or who says bad things about previous lawyers. A good question lawyers should ask themselves, he said, is whether or not they would loan money to this client.

Maintaining a budget is also critical. In establishing one, Becker suggested that lawyers create four major categories: people, facilities, marketing and technology. Also, lawyers should cover such contingencies as increases in employee benefits, a need for additional space, the cost of purchasing new software and training staff to use it.

Yet even with a good budget, a firm may need additional money at times. Becker said that firm’s and solo lawyers need to have working capital to fund cash shortages, technology or equipment expenditures and funding growth scenarios.

Becker noted that too many lawyers set an annual budget, add an amount for inflation, divide by 12 and then forget about it. The reality is that lawyers need to watch expenditures and income to make adjustments to their budget as they go through the year.

Internal controls are important in all firms with more than one person. These controls form a set of checks and balances to ensure transactions are authorized and that employees know what is expected of them. Even one-person firms can benefit from periodic reconciliations and maintaining documentation for purchases, insurance and leases.

At a minimum, Becker said that lawyers should compare their actual results to their budgets, review their firm check register and bank reconciliations, look over trust account balances and activity, review the general ledger, check the payroll register, cross-train employees and either keep financial duties segregated or hire an accounting firm for assistance.

Becker said that lawyers should take the advice they would offer clients who are considering buying a business, evaluating their practice on its strengths, weaknesses, opportunities and threats as if they were prospective owners.

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