Minding Your Business

Begin the journey to financial health by developing your firm's mission statement. This missive should clearly outline your business objectives, strategies, and principles. Your mission statement should be brief, and one that can be used by your firm's attorneys when introducing themselves and the firm to potential clients; your firm's “elevator speech” so to speak. Before you can manage your business, you must have a clear understanding of it. Evaluate your business by beginning with an in-depth description of your practice, starting with the basics:

• structure (sole practitioner, partnership, LLP, corporation, etc.);
• address;
• square footage;
• term of lease and renewal options;
• headcount;
• practice areas, and
• operating procedures.

Once you have laid out the basic building blocks of your firm, you can then begin to evaluate them, make adjustments, and assess your business goals, and ultimately create your mission statement.

Firm Management/Budgeting

After you have a clear understanding of where your firm is and where you want it to be, you must have a thorough comprehension of law firm financial management. The first step to understanding your financial health is the preparation of detailed, 12-month capital and operating budgets. Include in your budgets all current and projected expenses, no matter how minor, and set up a payment schedule. Once you have prepared your budgets, do not make the mistake of sticking them in a drawer, and forgetting about them. Budgets are living documents that should be reviewed and tweaked as often as necessary. You could budget a certain amount for the cost of paper in January, and in June the cost could increase by 15%. If you do not make this mid-year expense adjustment, it may very well be that you will have an unexpected cash shortfall come July.

Often overlooked projected budget items are related to an expansion of a practice area. As an example, if you are planning on expanding your corporate department by adding corporate litigation to your services, you need to project more than increased staff-related expenses. For example, before any expansion decisions are made, an in-depth evaluation of your technology is essential. Your server may not be able to accommodate the increase in hardware, your software may not meet the needs of the expansion requirements or your software license may not allow additional users. This all translates into increased expenses. Or, your expansion may make it necessary to ask your bank for an additional line of credit or leasing financing. This is something that you and your bank should know about and plan for ahead of time. When approaching a bank for a line of credit or leasing financing, a point of concern will be your ability to manage your business. Approaching a bank for financing at the eleventh hour could cast a shadow of doubt on this ability.

Although not an actual firm expense, you should also budget monthly client expenses as best you can, so that you have a better picture of your monthly cash requirements. In addition to budgeting for your firm's expenses, it is equally important to budget your revenue flow. Controlling your firm's income requires diligent management of your billing and collection procedures. In my many years in law firm management, I have yet to come across a partner who eagerly sets aside time to bill.

Not only is billing your time important, but just as important is billing out your disbursements. Prepaying client expenses is, in essence, an interest-free loan. Your firm is expending funds from its operating account to pay expenses on behalf of your clients. When clients do not reimburse for those expenses, they immediately become a firm expense, further reducing partner income. Now, although you cannot present a bill and ask for payment at the end of each telephone call, you must consistently log your time and bill it monthly. The longer you wait to bill your client, the more resistance you could receive on the payment end. When clients receive a bill for work performed six months ago, it is more than likely that they have forgotten the time that you spent early on in the case. Consequently, it will be harder for you to explain and justify the amount of time expended on the intricate details of the matter, or the expenses incurred and disbursed. Hence, you end up with unnecessary write-offs, smaller profit margins, and less partner income.

The one thing that I have found partners to dislike even more than the billing process is the collection process. Collections must be managed just as closely as billing, as this is how you project your monthly income and ability to pay your bills, and yourself. Again, waiting six months to ask clients to pay their bills gives them the opportunity to negotiate a reduction in your fee.

Financial Reports

Good financial management must be supported with accurate management reports. All client-related reports should be run by firm, department, attorney, and client; and all client-related and financial reports should be “aged” by 30, 60, and over 90 days. Your reports should include:

• work-in-progress;
• unbilled disbursements;
• billed time;
• billed disbursements;
• write-offs of time and disbursements (before and after billing);
• accounts receivables;
• collections of fees and disbursements (including turnaround time);
• realization rates;
• attorney and paralegal billable and non-billable hours;
• payables; and
• projected expenses.

General Ledger

Managing your business also requires analyzing your General Ledger on a regular basis. Included in this analysis is a comparison of line-item expenses from month-to-month and from one year to another. This analysis will help you spot and investigate unusual vendor activity and fluctuations in costs.

Marketing

Remember the days when law firm marketing was taboo? Times have changed. Today marketing is a vital component of practice management. Before venturing out into the world of marketing, it is important to first do a profitability analysis for each of your firm's practice areas. Taking a global financial view of your firm can be deceiving. A firm as a whole may be profitable, but a profitability analysis by practice group may reveal that one practice area is being “carried” by the others, thus reducing overall firm profitability. After determining profitability by practice area, delve deeper into the practice by doing a partner profitability analysis. Again, the financial results of a practice area may be profitable, but you may find that there is a partner being “carried” by the others in the department.

Once you have a financial understanding of each of your practice areas, you are ready to initiate a marketing strategy. Begin with a budget and a method to track individual, practice area and firm results. The first place to look for marketing opportunities is within your firm. Partners and associates should be trained to “mine” their personal and business contacts by educating clients, contacts, and families, on exactly what it is they do, and just as important, what everyone in the firm does.

Corporate attorneys should be touting the menu of expertise the firm has to offer to clients and business contacts. Why should a corporation go to the law firm next door for litigation issues only because it has no idea that you have a strong, successful litigation department? Moreover, why should the CEO of that same corporation go to the law firm down the street with his or her personal tax problem, because he or she has no idea that your firm has one of the best tax departments in the area? Implement a strong business development training program and you will be surprised at the wealth of business you will find within your own four walls.

When developing your marketing plan, it is important that you first know and understand your competition and its pricing structure. This will allow you to remain competitive and highlight what sets your firm apart from the others. In short, good lawyering, albeit important, is only one aspect of running a successful practice.

Ultimately, a comprehensive approach to understanding and managing your firm's finances is the key to the financial success of your business. Yes, I said business, and if you do not mind your business you could soon be out of business.

Susan C. Finelli is the executive vice president of AGL Associates, a consulting firm that specializes in law firm consulting, business development and training for lawyers. She has a dynamic management career building and leading top-performing organizations, combining strategic and financial expertise with measurable achievements in operations/organization design, cost reduction, productivity/process improvement, and is a skilled trainer and educator. Finelli is the author of the novel “Behind the Shadows.”

In today's economic climate, it is essential for law firms to pull away the opaque financial veil, and keep a razor-sharp eye on the bottom line. Transparency is the buzzword of the political arena, and it must also apply to the business of law. Gone are the days when law firms were able to throw money at a problem and carry on, business as usual. To remain competitive, it is important for law firms to peel away the financial layers of their businesses, identify potential problems, forecast future revenues, and manage their financial health.

Before taking any journey, you must first know where you are going, and how you plan to get there. The first step on the journey to law firm financial health begins with understanding law firm finances, a firm's road map to success. Mapping out your firm's financial plan may seem daunting at first, but once you start, you will begin to have a better understanding of the inner workings of your business, and will be able to project into the future.

Mission Statement

Begin the journey to financial health by developing your firm's mission statement. This missive should clearly outline your business objectives, strategies, and principles. Your mission statement should be brief, and one that can be used by your firm's attorneys when introducing themselves and the firm to potential clients; your firm's “elevator speech” so to speak. Before you can manage your business, you must have a clear understanding of it. Evaluate your business by beginning with an in-depth description of your practice, starting with the basics:

• structure (sole practitioner, partnership, LLP, corporation, etc.);
• address;
• square footage;
• term of lease and renewal options;
• headcount;
• practice areas, and
• operating procedures.

Once you have laid out the basic building blocks of your firm, you can then begin to evaluate them, make adjustments, and assess your business goals, and ultimately create your mission statement.

Firm Management/Budgeting

After you have a clear understanding of where your firm is and where you want it to be, you must have a thorough comprehension of law firm financial management. The first step to understanding your financial health is the preparation of detailed, 12-month capital and operating budgets. Include in your budgets all current and projected expenses, no matter how minor, and set up a payment schedule. Once you have prepared your budgets, do not make the mistake of sticking them in a drawer, and forgetting about them. Budgets are living documents that should be reviewed and tweaked as often as necessary. You could budget a certain amount for the cost of paper in January, and in June the cost could increase by 15%. If you do not make this mid-year expense adjustment, it may very well be that you will have an unexpected cash shortfall come July.

Often overlooked projected budget items are related to an expansion of a practice area. As an example, if you are planning on expanding your corporate department by adding corporate litigation to your services, you need to project more than increased staff-related expenses. For example, before any expansion decisions are made, an in-depth evaluation of your technology is essential. Your server may not be able to accommodate the increase in hardware, your software may not meet the needs of the expansion requirements or your software license may not allow additional users. This all translates into increased expenses. Or, your expansion may make it necessary to ask your bank for an additional line of credit or leasing financing. This is something that you and your bank should know about and plan for ahead of time. When approaching a bank for a line of credit or leasing financing, a point of concern will be your ability to manage your business. Approaching a bank for financing at the eleventh hour could cast a shadow of doubt on this ability.

Although not an actual firm expense, you should also budget monthly client expenses as best you can, so that you have a better picture of your monthly cash requirements. In addition to budgeting for your firm's expenses, it is equally important to budget your revenue flow. Controlling your firm's income requires diligent management of your billing and collection procedures. In my many years in law firm management, I have yet to come across a partner who eagerly sets aside time to bill.

Not only is billing your time important, but just as important is billing out your disbursements. Prepaying client expenses is, in essence, an interest-free loan. Your firm is expending funds from its operating account to pay expenses on behalf of your clients. When clients do not reimburse for those expenses, they immediately become a firm expense, further reducing partner income. Now, although you cannot present a bill and ask for payment at the end of each telephone call, you must consistently log your time and bill it monthly. The longer you wait to bill your client, the more resistance you could receive on the payment end. When clients receive a bill for work performed six months ago, it is more than likely that they have forgotten the time that you spent early on in the case. Consequently, it will be harder for you to explain and justify the amount of time expended on the intricate details of the matter, or the expenses incurred and disbursed. Hence, you end up with unnecessary write-offs, smaller profit margins, and less partner income.

The one thing that I have found partners to dislike even more than the billing process is the collection process. Collections must be managed just as closely as billing, as this is how you project your monthly income and ability to pay your bills, and yourself. Again, waiting six months to ask clients to pay their bills gives them the opportunity to negotiate a reduction in your fee.

Financial Reports

Good financial management must be supported with accurate management reports. All client-related reports should be run by firm, department, attorney, and client; and all client-related and financial reports should be “aged” by 30, 60, and over 90 days. Your reports should include:

• work-in-progress;
• unbilled disbursements;
• billed time;
• billed disbursements;
• write-offs of time and disbursements (before and after billing);
• accounts receivables;
• collections of fees and disbursements (including turnaround time);
• realization rates;
• attorney and paralegal billable and non-billable hours;
• payables; and
• projected expenses.

General Ledger

Managing your business also requires analyzing your General Ledger on a regular basis. Included in this analysis is a comparison of line-item expenses from month-to-month and from one year to another. This analysis will help you spot and investigate unusual vendor activity and fluctuations in costs.

Marketing

Remember the days when law firm marketing was taboo? Times have changed. Today marketing is a vital component of practice management. Before venturing out into the world of marketing, it is important to first do a profitability analysis for each of your firm's practice areas. Taking a global financial view of your firm can be deceiving. A firm as a whole may be profitable, but a profitability analysis by practice group may reveal that one practice area is being “carried” by the others, thus reducing overall firm profitability. After determining profitability by practice area, delve deeper into the practice by doing a partner profitability analysis. Again, the financial results of a practice area may be profitable, but you may find that there is a partner being “carried” by the others in the department.

Once you have a financial understanding of each of your practice areas, you are ready to initiate a marketing strategy. Begin with a budget and a method to track individual, practice area and firm results. The first place to look for marketing opportunities is within your firm. Partners and associates should be trained to “mine” their personal and business contacts by educating clients, contacts, and families, on exactly what it is they do, and just as important, what everyone in the firm does.

Corporate attorneys should be touting the menu of expertise the firm has to offer to clients and business contacts. Why should a corporation go to the law firm next door for litigation issues only because it has no idea that you have a strong, successful litigation department? Moreover, why should the CEO of that same corporation go to the law firm down the street with his or her personal tax problem, because he or she has no idea that your firm has one of the best tax departments in the area? Implement a strong business development training program and you will be surprised at the wealth of business you will find within your own four walls.

When developing your marketing plan, it is important that you first know and understand your competition and its pricing structure. This will allow you to remain competitive and highlight what sets your firm apart from the others. In short, good lawyering, albeit important, is only one aspect of running a successful practice.

Ultimately, a comprehensive approach to understanding and managing your firm's finances is the key to the financial success of your business. Yes, I said business, and if you do not mind your business you could soon be out of business.

Susan C. Finelli is the executive vice president of AGL Associates, a consulting firm that specializes in law firm consulting, business development and training for lawyers. She has a dynamic management career building and leading top-performing organizations, combining strategic and financial expertise with measurable achievements in operations/organization design, cost reduction, productivity/process improvement, and is a skilled trainer and educator. Finelli is the author of the novel “Behind the Shadows.”