When managing a law firm in a recovering economy, it’s important to pinpoint and track the financial position of your firm.
Here are 10 areas to focus on to build the fiscal health of your practice.
1. Billable hours. It all starts here. If hours never get charged, they’ll never be collected. Trends in billable hours can provide early warning signs of revenue problems.
2. Billings. Track billings in dollar amounts and exclude disbursements advanced. If billings begin to fall, investigate billable hours, write-downs from standard rates and aging accounts that have not been collected.
3. Realization. Realization is driven by variations from the standard rates usually charged. If this indicator drops, you may need to review client acceptance policies or associate training and efficiencies.
4. Days revenue outstanding. Track this by taking daily revenue and dividing it into the month-end amount of unbilled and uncollected fees. If there is an increasing number of days revenue outstanding, you may need to review your billing and collection procedures.
5. Revenue. This is a gross indicator of whether to look more closely into specific areas. Track by departments, geographic location, specialization, etc., to ascertain if the firm’s service mix is changing.
6. Expenses. Track expenses both overall and by major categories, including sales personnel, direct costs, benefits and facility costs. Spend most of your time on negative changes and on finding out what causes the expense.
7. Staff ratio. Examine the ratio of associates to partners, as well as support personnel. Since payroll is usually a firm’s largest expense, keeping a small ratio of revenue-producing firm members to others is crucial.
8. Distributable income. This brings all the other factors together, and indicates whether the firm is growing or dying. If your distributable income is too low, review the other indicators to find ways to increase it.
9. Cash. You should have a detailed plan for controlling cash flow. That way, you can identify periods of potential shortage or excess and plan for financing or investing.
10. Communication. Use the information gained to identify problems and opportunities. It is essential to communicate these with others in your firm, and to continue to communicate information as the year goes on. Use line or bar charts when appropriate. Building or rebuilding the financial health of your firm is a group effort.