Colorado Bar Association 5th Annual Solo & Small Firm Conference - 2003

The Business of Law – Internal Controls for a Financially Healthy

Law Practice• David Bilinsky• Ronald L. Seigneur

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Who is with us today?

• Lawyers• Administrators• Consultants/Others• Who has been involved

with evaluating the financial performance of their firm?

• Who here is happy with the financial results of their firm/practice?

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Make this Session a Hit!

• What areas must be touched upon to make this a hit?

• What burning issues do you need addressed?

• This session is driven by YOU!

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Real Story….• Associate who bills $1.1 million dollars

a year• Put your hands up if you would give this

associate a bonus • How much of a bonus? • $10,000? • $20,000? • $100,000?• This associate cost the firm 1.3

million/year• How much would you pay this associate

to go over to your competition?

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Introduction

• Hildebrandt’s 2003 mid-year report:

• Many small and mid-sized firms have performed well

• Strongest performers have been firms with:– a well-formed sense of

strategic direction and practice focus

– Competitive level of profitability and compensation

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Law Firm Failures

• Common Themes:– Weak Management– High Debt Levels– “Size” based growth plans– Eat-what-you-kill

compensation systems– Lack of core values

• We are going to look at ways/means to build a financially healthy practice

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Presentation Overview

• Strategic Planning• Software for Time &

Billing/Accounting/General Ledger• Setting and Collecting Fees• Financial Information you Must Know• Alternative Billing Methods• Billing Tips• Internal Controls

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Strategic Planning

• The role of budgeting in strategic planning

• Business development strategies– Think Wal-Mart

• The importance of a vision & mission statement

• ..and in following thru from vision to evaluation….

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Vision

• Need to know what type of practice will you have:– Do the math– Determine who are

your most profitable clients/files/lawyers

• Then – identify your most profitable niche

• Focus on where you want to be in 5 years.

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The role of budgeting in strategic planning

• The process of building an operating budget can facilitate a greater understanding of how the firm’s limited resources can best be applied to the organizations opportunities

• Selecting who is involved and establishing a sufficient timeline are critical

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Business development strategies

• Statistics indicate that an “average” firm will spend between 2 to 5% of annual revenues on direct marketing expenses– Some specialty practices will require

substantially more

• Play to the strengths of the individuals within the firm in terms of how best to deploy the personal side of client development activities

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4 Generic Business Strategies:

• Differentiation– General Law Firm

• Focused Differentiation– Niche Practice

• Cost Leadership– High volume at

low cost

• Cost Focus– High Volume

Niche

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Business development strategies

• Focus on where you want the firm to be in 3 to 5 years in terms of where to focus efforts

• Determine where your best opportunities originate and who is making the decisions on what counsel to utilize

• Remember that it often takes as much as 2 to 3 years to solidify your position in the marketplace, unless you have something to differentiate yourself from the competition

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Business development strategies – Differentiation elements, such as:

• Location

• Responsiveness

• Convenience

• Methods and style of communications

• Experience

• Reputation

• Price

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The importance of a vision & mission statement

• The vision statement is the broad based description of what the firm will strive to be over time.

• The mission statement defines how the enterprise will go about achieving it’s vision relative to your values and your culture

• See sample vision & mission statement

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Software for Time & Billing/Accounting/General Ledger

• TABS, PC Law, ProLaw• QuickBooks & Timeslips• Integrated vs. non-integrated

systems– Amicus Attorney + PCLaw– Time Matters / Billing Matters +

accounting– Practice Master + Tabs III

• Using outside resources to maintain your books

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Regularly Reconcile Your Trust Accounts or Supervise Those That Do

• Trust accounts: Greatest risk for ethical trouble

• Separate ledgers for each client’s file (not just for each client)

• All withdrawals by check only• Maintain a good audit trail• Reconcile monthly• Keep all records.

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Best Bets

• Ron: For small & solo practices, the use of QuickBooks (www.quickbooks.com) for financial reporting and Timeslips (www.timeslips.com) for time & billing is the best bet, although there are certainly many other options.

• Dave: PCLaw + Amicus Attorney or Time Matters - accounting with trust module

• Regardless of the software you choose to use, invest in the most current versions and adequate training.

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Integrated vs. non-integrated systems

• A key decision is whether or not to use an integrated system that allows general ledger activity, time and billing activity and trust accounting to work together, thereby minimizing the need for duplicative entry of data.

• Integrated accounting systems require more training and implementation setup.

• But can offer greater efficiencies and deceased ethical risk.

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Using outside resources to maintain your books

• Use a qualified bookkeeper:– Posting of cash receipts to ledger

and client accounts– Accounts payable– Payroll & payroll tax obligations– Posting and Reconciliation of

Trust accounts

• Use a payroll service• Locate a CPA who

understands your business.

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Setting and Collecting Fees

• The importance of client and matter screening

• Using survey & and other market data to set fees

• Follow up guidelines for collections

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The importance of client and matter screening

• Proper selection of the clients and matters you choose to apply your talent and resources to begins with the intake process established to insure the best opportunities are identified.

• Often when fee collection issues arise at the “back door”, they can be traced back to a lack of proper screening at the “front door”.

• Does the client have the willingness and ability to pay for the services rendered?

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Profitability Analysis• Take your desired annual income (say

$150,000). Collected billings = approximately twice that- $300,000.

• Factor in bad debt at 10%. Billings = approximately $330,000/year.

• There are approx 231 working days/year (365 minus: 21 days vacation, 104 weekend days, 9 statutory holidays).

• This indicates that you must bill approximately $1,400/day ($330,000/231).

• If you bill at $250/hour, this indicates that you must log 5.6 billable/hours/day – every day.

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Practice is Hard Work:• 2500 hours (50-60

hours per week)• 1750-1850 of

those on client billings

• 200 hours on marketing, prof activity, community service and pro bono

• 200 hours on management

• 200 hours on writing, CLE and prof reading

• balance (100) on admin and misc tasks

• MUST record billable and non-billable time!

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Using surveys & and other market data to set fees

• The Colorado Bar Association published a detailed economic survey in 2000 based on 1999 data – this is a good resource to help understand the local market.

• Altman Weil annually publishes their Small Law Firm Economic Survey (www.altmanweil.com)

• Dialogue with your peers to learn about what works and doesn’t work in their practices.

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Top 10 Tips on Ca$h Flow and Fees

1. Have a fee agreement2. Know your gross and

net on each file3. Track overdue

accounts and do something -105 day lag

4. Project Billings/cash flow needs

5. Track collected % of billings = 90% or better

6. Track actual vs budgeted costs

7. Track your WIP. WIP over 180/total WIP = 20-40%

8. Track disbursements Total Debt/net fixed assets = 50-80%

9. Receivables - 15% is high

10. Daily time summaries vs budgeted billable time

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Follow up guidelines for collections

• Proper follow up rules on outstanding accounts receivable can yield significant results.– Provide an orientation to all new clients on the

procedures and expectations for billing and collection of fees and costs

– Use engagement letters for all matters– Send reminder statements regularly– Establish the right to charge late fees in your

engagement letter– Remember the 45 day window of opportunity

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Top 10 Financial Reports you must have

1. Annual profit and loss stmt

2. Annual Budget vs. actual costs

3. Cost to handle each file

4. Your realization rate

5. Compensation system and how it affects performance

6. WIP on each file

7. Disbursements on each file

8. Budget for each file

9. How your partners and associates are doing

10. Overall firm debt

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The Profit & Loss Statement

• A properly formatted profit and loss statement is arguably the most important on-going management tool available for the management and oversight of financial resources.

• To be useful, the P&L must be:– Accurate;– Timely; and– In the proper format

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The balance sheet

• Assets = Liabilities + Owner’s Equity– This is the equation that keeps all financial

transactions in order under what is commonly referred to as double entry accounting

• Think of the balance sheet as a snapshot of the entities financial position, while the profit & loss statement is the motion picture between balance sheet snapshots.

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Realization and Utilization Measures

• Realization statistics are commonly tracked in great detail by larger law firms as a key management tool.– Realization can be calculated based on:

• Billing = fees billed/fees at standard rates• Collection = fees collected/fees billed• Overall = fees collected/fees at standard rates

• Utilization is the measure of chargeable time in relation to total time available.

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Profit center accounting

• A profit center can be defined as:– A client or group of clients– An individual or group of individual

timekeepers– An area of practice

• It is a subset of overall operations and is useful for evaluating where the best returns on the firms resources can be found.

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Alternative Billing Methods

• Contingent fee arrangements

• Fixed or flat fee arrangements

• Success or incentive systems - ACES

• Hybrid fees

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Contingent fee arrangements

• A contingent fee practice will typically require more capitalization due to the larger fluctuations in cash flows.

• Consider capping the level of efforts and resources that will be devoted to contingent fee work.

• Keeping time records can still be critical for contingent fee work, notwithstanding that the fees are not based on time worked.

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Fixed fee arrangements

• Undertaking work on a fixed fee basis shifts much of the risk from the client to the practitioner, but at the same time establishes the financial commitment the client is making

• Experience is required to be able to determine the appropriate fee in advance, dependent on the type of work being done.

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Success fees/Hybrid fees/Incentive fees

• Certain types of work lend themselves to negotiated arrangements that stipulate different terms based on outcomes achieved.

• For example, if a litigated matter can be settled for a set amount or by a set date, an additional fee can be earned.

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Success fees/Hybrid fees/Incentive fees

• When circumstances permit, consider fee arrangements where part of the fee is based on hourly rates and part is contingent on on outcomes achieved.

• Another option is to include certain recurring services in a monthly retainer, with all other matters billed at established hourly rates.

• Consider the ACES™Model developed by Jeffery Carr

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Top 10 Billing Tips

1. Real time billing

2. Automated cost collection devices

3. Detail your billing statements with results and tasks

4. Fee agmt – internet and email time

5. Educate the client on billing methods

6. Real-time timekeeping + monitoring

7. Coach timekeepers

8. Show ‘no charge’ activities on invoices

9. Send all invoices to one person

10. Get office staff to keep time for accurate costing

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Billing for e-mail and Internet time

• As more efforts and communications are done via email and through the use of Internet resources, it is imperative to establish the proper protocols for recovering time and the cost of such resources.

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Real time billing for improved realization

• The value of legal services is elusive and intangible in nature.

• The best time to provide a bill for services rendered is dependent on the circumstances and the arrangement reached with the client, interim billings and billings immediately upon completion will normally work best.

• Often it is a people problem that holds up the ability to render invoices as quickly as they should be.

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Cost Recovery Issues

• The ability to recover costs advanced on behalf of the client will be dependent on the nature of the work, what is normal and customary for the type of work being done and the billing relationship established with the client.

• Developing appropriate methods and tools to capture the costs to be recovered is a critical aspect of making headway in this area.

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The “re:” Factor

• When providing detailed billing statements, watch out for repetitive entries that do not adequately describe the value of the work effort undertaken.

• For example, Telephone conference with Mr. Smith should always include an re: to delineate what the nature of the call was about, etc.

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Internal Controls – General Points

• Cash receipts and disbursements

• Equipment and supplies

• Access to electronic information

• Identity theft

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Cash receipts and disbursements

• Segregation of duties is the first option, but in many small practices this cannot be done to the extent normally done in larger firms.

• 99%+ of all workers are honest and trustworthy, but some will fall to temptation when internal controls are weak or there is a motive/need.

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Cash receipts and disbursements

• Reconcile the bank statement on a contemporaneous basis and at least spot check the detail.

• Generating and reviewing adequately formatted and detailed financial reports on a timely basis is the best approach to minimizing the risks of malfeasance in the areas of cash resource controls.

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Equipment and supplies

• Shrinkage in office supplies and, on occasion, equipment and furnishings, can occur when controls are weak and unmonitored.

• Pay attention to trends and unusual items in the firms financial statements and underlying support documents.

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Access to electronic information

• With the growth in electronic communications, including court mandated filings, on-line collaboration on work product, remote access and telecommuting, the need to maintain security over access to electronic data is becoming a critical issue.

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Access to electronic information

• Set a policy for all personnel regarding the need to maintain protocols in all aspects of utilizing and accessing electronic data

• Establish appropriate procedures to insure adequate backups are made. tested and stored

• Consider disaster recovery planning

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Identity theft

• This is a growing problem in society generally, but in the context of a law firm one should not lose focus on the need to insure your clients and referral sources do not confuse your firm with others, in terms of personnel, capabilities and resources.

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Top 10 Steps to a More Profitable Practice

1. Determine your annual profit/loss

2. Compare your profit/loss against your budget

3. Find your profit/loss on every file/client and practice areas

4. Select the 5 most & least profitable clients, files and practice areas

5. Set your strategy to pursue the top 5

6. Set your budget + annual income

7. Use alternate billing to advantage

8. Tweak compensation system to your advantage

9. Be ruthless on dropping bad clients

10. Bill – regularly and often

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Colorado Bar Association 5th Annual Solo & Small Firm

Conference - 2003

Questions?

Thanks!© 2003 Ron Seigneur & David J. Bilinsky