Archive for Financial Management

5 Steps to Improve Your Firm in 2012

By on January 2, 2012

It’s time for your firm to make your 2012 News Year Resolutions; these might help you decide on some that will be sure to please the partners.

Improve Cash Flow. I’ve written several articles in the past regarding improvements in cash flow, mostly around the collections process, here is one. Improving cash flow starts with the engagement process. All new clients and even some new matters require a standard firm engagement letter that is executed BEFORE starting work for the client. Payment terms must be clearly identified along with retainer requirements. Is the “retainer” classified as an IOLTA payment in your state, there is actually a big difference, read here.

The use of automated Collections software with Wizards (workflow) will greatly improve collections, see Mary’s story here and here. The idea is simple, you’ve done the work, you should get paid. One unique possibility is to ask clients to pay by ACH Debit, we all do it for expenditures like our credit cards, monthly mortgage payments, utility bills etc. At the end of the month just send the client an email with a PDF bill attached and then after an agreed to period, like 20 days, sweep the money from their bank account. There are much fewer accounts receivable issues and cash flow improves immediately.

Provide Partners with Information not Data. Law firms are guilty of providing partners with stacks of month end reports with tons of “data”. What the partners want to know is; so what?, what does this mean?, what should we do about it?, how does it affect us?. The CFO at the firm should make sure the information the partners receive is understood by the partners from a business point of view. Partners are attorneys, they too many times want to see all the details, all the reports, and do their own research, that’s what attorneys do. A smart law firm will boil all this down into summary format and provide the analysis up-front. A good Business Intelligence system with a data warehouse will help automate this process.

Provide Accrual Based Analysis not Just Cash Reports. Most firms in this country choose to operate on a cash basis, however cash basis reporting. See my story on cash vs. accrual accounting here. Beginning in 2012 start educating your partners on accrual basis reporting, show them a more clear picture of how the law firm is structured from a profitability point of view. There is more to law firm profitability than the current cash balance in your check book.

Reduce Risks. Rick management becomes a much more important topic as a firm grows geographically and diversifies into more areas of law. Why, because there is more room for errors that can be very embarrassing and costly. Conflict checking for business issues and adherence to federal laws may actually out-weigh some of the normal legal representation issues. For example, here is a story dealing with a potential new client embarrassment. Make you’re your firm isn’t caught up in a SDN violation, it could be very costly. Check this out.

Lower Internal Costs through Productivity Gains. This is so easy to say, yet a little more difficult to do. We’ll focus on improvements in just the quality of what you do, see this story on quality. There can be many more ways to improve productivity and lower costs, check this out.

I hope your firm enjoys a peaceful and happy new year.

 

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Categories: Best Practices, Financial Management, Law firm billing, Management, Productivity, The Legal Market

It’s a Great Idea – But Who Will Pay for It?

By on December 4, 2011

Legal Project Management is a great idea that, apparently, no one wants to pay for.  Law firms find it hard enough to get paid for things they actually “do”. These tend to be specific tasks, write a letter, file a brief, a deposition, a court appearance, etc. It is difficult to get paid for “review file” because the client believes that this type of task should be covered as part of general overhead and therefore included in the rates charged for actually “doing” something. Yet reviewing the status and planning the next course of action might very well be “project management” activities.

Sometimes it’s difficult to describe exactly what Project Management (PM) really is, what do you really “do”?

 Wikipedia even has a definition for Legal Project Management. It’s interesting that even Wikipedia points out the use of PM in the e-Discovery arena.

 We were fortunate to have Steven Levy at our RainMaker Annual Client Conference this year. He provided us some interesting perspectives on legal project management. You should check out his book on Amazon, it is quite interesting.

 One thing is certain; it is hard to understand Project Management. I can tell you for certain that without it you’ll have mismanaged projects and they are VERY COSTLY from a number of angles, including unhappy clients.

  Law firms already do Legal Project Management, sometimes by accident, but do it. The secret to success is to define the best you can to clients and find ways to get paid for it. Project Managers are crucial to the success of any defined project, both firms and clients must agree to a way to pay for the true cost.

 

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Categories: Best Practices, Financial Management, Management, Productivity, The Legal Market

Tracking Work Location – A Taxing Issue

By on November 27, 2011

Law firms today have a very mobile workforce, attorneys who may work from home, and at one or more branch offices. At the same time cities and states are scratching for tax revenue to keep themselves afloat. It truly is a taxing problem.

 Here is an example of a potential issue:

The XYZ Law firm has an office in Philadelphia, PA and Cherry Hill, NJ (just across the river). Attorney Kevin lives in West Chester, PA (not part of Philadelphia) and has an office set-up in his home where he frequently works. Kevin spends 2 days a week in the Cherry Hill office, 2 days in the Philadelphia office and 1 day working from home. The firm shows that Kevin is “assigned” to the Cherry Hill office. On occasions he travels to Harrisburg, PA and spends the entire day on-site at his biggest client working on various matters.

 It’s now time to file tax forms, there are at least 4 tax entities involved at the city and state level. How does the firm decide how much revenue to report for:

Philadelphia – Business Privilege Tax (firm)

Philadelphia –City Wage Tax (attorney)

Commonwealth of PA – Corporate Tax (firm)

State of NJ–Corporate Tax (firm)

 Firms should track the actual “work location” on every attorney time entry. If the attorney is physical sitting in the Philadelphia office working on a matter, the work location is “Philadelphia”. Don’t confuse this with the “office” that the client or matter is assigned in the time and billing system. Many times the client or matter is assigned to the office of the billing attorney, or some other professional type. Revenue generated based on the Billing Attorney’s office may not be accurate enough to satisfy the tax collector.

 Preparing an analysis of time recorded and collected by work location, should satisfy any audit requirements. In most systems the work location code can be made a mandatory field for each time entry.

 (Disclaimer: I’m not an accountant, nor am I qualified to offer any tax advice whatsoever.)

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Categories: Best Practices, Financial Management, Law firm billing

Year-end Survival Guide for Law Firms

By on November 20, 2011

Law firms are quite unique, as compared to most other businesses; they normally choose to operate on a cash basis. Income isn’t earned, from a tax point of view, until that cash actually comes in the door.  In addition, expenses can’t be deducted until they are actually paid. Cash-in, cash-out that’s how law firms work. Even though smart firms might keep unbilled, accounts receivables and accounts payable on their balance sheet (accrual accounting) it really doesn’t factor into revenue or taxable income. One benefit of cash accounting is that income tax is deferred on accounts receivable, which may or may not be collectible. Law firms on a cash basis can do much more yearend maneuvering to manage the tax consequences of either the corporation or partnership.

 In a Slow Year – Ways to Increase Income

  • Of course, the best way to increase income is by billing more hours through November and collecting it all by December 31st. By this time of the year it’s a little late to expect work to be billed and collected.
  • Stop paying expenses probably has single biggest impact on income. Contact your vendors first so that they understand that November and December bills will be paid by mid-January.
  • Contact clients with large receivables, especially those that are old and risky and negotiate discounts for payment in December. Surprisingly, some companies have “use it or lose it” budgets and they just may want to get this liability off their books. Keep in mind that they operate on an accrual basis; it’s good to reduce liabilities for them.
  • Contact clients with large projects and see if you can get more upfront retainers, (not IOLTA payments). This additional cash will probably be calculated into taxable income.

 In a Good Year – Ways to Keep Taxes Down

  • Just the reverse of a slow year, one excellent way to keep taxes down is to pay forward 2012 expenses in December 2011. This doesn’t mean going on a buying spree. Many vendors would gladly bill2012 services and accept payment in early January. (Checks dated December 31st this year will reach them in early January).
  • One hidden expense that is sizeable in some firms is credit cards, go online and pay off all balances.
  • Make purchases in 2011 instead of 2012 for hardware and software that can be put into service pretty quickly. Only buy the items you were going to purchase in the upcoming year.
  • Contact some large clients and tell them you’ll delay November and December billings and instead bill them in early January for immediate payment. This might benefit the client since they are accrual basis, and if they receive a bill in 2011, it impacts their financials.  

 Beware of Pitfalls

  • Beware of the false sense of security that cash accounting provides. Many of the above suggestions have short term benefits with a potential longer term negative impact.
  • Drawing down the line of credit in a slow year-end, for any reason, is risky.

 Best Practice

Manage the firm day to day on an accrual basis. Accrual reporting provides cleaner snapshot of the health of the firm. Sure, you’ll compensate partners and pay taxes on a cash basis, but accrual will allow you to sleep at night knowing what tomorrow will look like.

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Categories: Best Practices, Financial Management, Law firm billing, Management

Win-Win AFA’s at Work – Stage Engagements

By on November 12, 2011

We are hearing from more and more firms, especially those doing insurance defense work, about how they have implemented an Alternative Fee Arrangement that seems to be a good compromise. We’ll call it Stage Engagements and it’s quite simple. A firm will take on a volume of matters from a carrier in trade for a fixed fee for various early stages of each case. Each stage has a start and end point, the end point is a “triggering event”. There can be multiple stages prior to outright litigation.

Here are some examples of triggering events:

  1. End of the “Presuit Period”.  This is a specific date, sometimes extended upon agreement of the lawyers.  But typically it is 90 days from the notice of intent.
  2. X dollars for all work up performed up to the first three depositions including plaintiff’s deposition.
  3. X dollars for work performed during the phase of trial preparation.
  4. X dollars for work performed during the initial discovery up to and including the plaintiff’s deposition.

 The Client Wins. Clients are looking for fixed price, especially in early case work. The early stages tend to be very low cost to the client and with a fixed price, outside counsel has no incentive to delay, or expand the scope of work required. Clients maintain the option of handing-off the case to another litigation firm if it deems the case if too complex or risky for the early-stage firm.

 The Firm Wins. Even though the firm doesn’t make a lot of money on the fixed price stages, it does position itself to inherit the case if an early settlement can’t be reached and the case goes to trial. As we all know, litigation scales up the value proposition and the billable hour normally rules. Furthermore, with the volume of work being acquired, firms can push the work down to the lowest practical level of competency, build best practices and use technology to keep internal costs down.

 Here are some tips to firms looking to take on Stage Engagements:

  1. The first key is to clearly identify what tasks are required in each Stage. Keep in mind that fixed scope = fixed fee. Any material “out of scope” tasks or turn of events requires a re-negotiation with the client.
  2. Normally a Stage isn’t billed until it is complete. Firms need to figure in the impact on cash flow when taking on a large number of new files. Also keep in mind that clients are taking 45-90 days to pay even under flat fee arrangements.
  3. Most modern legal billing systems will easily allow a firm to track all time entries in WIP for any Stage, and then simply bill them at a fixed fee amount. The timekeepers working on the matter get their utilization (hours billed) calculated based upon the fixed fee and see some sort of adjustment. More advanced systems might send an attorney a SmartAlert email when 90% of the budgeted fixed fee has been worked. SmartAlerts might also be sent to billing when a triggering event takes place from the Docketing system, notifying them it’s time to bill.
  4. Firms can run internal reports comparing profitability (or the lack of) on not just the Stages, but also on the entire matter if it goes beyond Stages and becomes hourly billable. The idea here is to look at the big picture, not just small chunks.
  5. Improving internal processes and lowering costs will give firms the inside track on their competition securing additional work, use this as a key component of your business development process.

 Fixed fee work doesn’t sound very innovative; however this Stage Engagement approach can be a simple win-win for both sides while we all invent a better set of AFA’s.

 Let me know what   you have experienced in Stage Engagements.

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Categories: AFA - alternative fee arrangement, Best Practices, Financial Management, Law firm billing, Management, The Legal Market

What is Your “Rate of Change”?

By on October 30, 2011

 Jack Welsh, the former Chairman and CEO of General Electric once said:

 “When the rate of change inside the institution is less than the rate of change outside, the end is in sight.”

  It reminded me how hard it is for a law firm to make changes, especially in the areas of finance and practice management. The claim is that law firms have been trailing behind corporate America for many years in such areas as; innovative use of technology, development of business and marketing plans, and communications with clients, and now Alternative Fee Arrangements. Many times it is frustrating to see firms hang onto the status quo for no good reason. Why is this?

  One reason might be that firms don’t have a “Vice President of Change”.  Successful corporations all have these people, many times there is on-going competition among the up and comers as to who is the best or most compelling Vice President of Change. You can probably guess, of course, where I’m going with this …. there really isn’t anyone with this actual title. The Vice President of Change is the brave soul who is willing to risk rejection, humiliation and being labeled as “not understanding” by just trying to improve the way things have always been done.  

  Law firms don’t control the rate of change on the outside; they can however embrace a Vice President of Change internally. Encourage attorneys and staff to be creative and propose changes that will benefit the firm. Let them know that the Vice President of Change is a welcome position.

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Categories: AFA - alternative fee arrangement, Best Practices, Financial Management, Management, Practice Management

You are not a Bank – Managing the Cash Cycle

By on October 23, 2011

Law firms are not banks. Banks are able to borrow money at almost no cost, and of course make money by charging interest and fees. Firms today are facing increased constraints in their management of cash. Unlike banks, they make no money on their “loaning” of money to clients in the form of client chargeable expenses. Firms need improved processes and tools to better manage cash flow.

The 2008-2011 economic downturn has resulted in a drop in billings, stretched out client payments and tougher access to lines of credit. One often overlooked source of cash is accounts payable, and the management of the overall spending process.

 Let’s take a look at the three-part Cash Management Cycle of a law firm. This cycle includes two assets and a liability; work in process (inventory), accounts receivable/collections and accounts payable. Accounts payables and the entire spend management process is often under managed.

 There are three ways firms can manage the overall cash spending process:

  1. Get more cash in advance, or keep from using firm cash for client expenses.
  2. Better manage the spending approval process with accountability and approvals.
  3. Better understand and manage actual cash payments.

 Here are some tips for getting more cash in advance or using less firm cash:

a)     For large client chargeable expenses such as outside experts or expert witness fees, financial audits, and so forth, arrange with the client for a direct payment “pass through”. In this case the vendor bills the firm for the expense, the firm approves the invoice and passes it directly to the client for payment. This way the firm never records the expense on its balance sheet and is not liable for payment. The firm should have the AP system track this pass through so as to respond to any vendor inquiries. Make sure the vendor understands the “pass through” process.

b)    Many clients are resistant to providing firms with big retainers, especially when they see the retainers being used for fees. Negotiate with clients to provide retainers designated for hard-cost expenses only. Your bill should always reflect expense retainer activity along with an image copy of each vendor invoice appearing on the bill. Your accounting system should handle this.

c)     Negotiate where possible with vendors providing client chargeable services that the firm will pay vendor invoices when the firm’s clients pay. Assure the vendor that all funds paid by the client will first be applied to “hard-costs” before firm fees are paid. Your system can automate this entire process without special handling.

 Here are some tips for managing the Spending Process:

a)     Implement a process requiring vendor invoices be approved by the person requesting the products or services along with at least one level of management. For example, a secretary and her billing attorney would approve an invoice for special outside copy expenses. It’s amazing how many invoices do not accurately represent the services either ordered or provided. An AP clerk would have no way of knowing this level of detail.

b)    Make people with spending budgets responsible for approving invoices. If a marketing manager has a budget and incentive for operating within budget allow the manager to have approval for all invoices being charged against this budget. Many firm managers with spending budgets never see or approve invoices prior to payment. They only see reports showing actual to budget performance periodically throughout the year. They never are engaged in approvals.

c)     Today’s accounts payable systems can easily align spending with management goals. Workflow technology allows staff and attorneys to approve all expenses before they are entered into accounts payable. Imaging of vendor invoices reduces costs and makes this process much easier.

 Here are some tips to better understand and manage actual cash payments:

a)     Understand your Average Payables Period (APP). APP is calculated by dividing the firm’s annual payables by 365 days, this provides the Average Daily Payables (ADP). Then divide the current accounts payable balance by this average to get the Average Payables Period. Can the firm increase the APP from say 30 to 40 days, generating an extra 10 days’ worth of ADP? You’re system should classify vendors who will allow their payables to be stretched, take advantage of their generosity.

b)    Negotiate for vendor discounts for faster payment cycles. For example ask the vendor for a 2% discount for payment in 10 days. This works well if the firm has reasonably good cash flow. Firms use to make money on bank “float”, interest made on short-term cash reserves. This is no longer the case and cash discounts for early payment might look attractive. Ask your vendor if there is an additional discount for ACH payment since it is quick and eliminates paper check processing.

  Law firms are not banks, Cash is King and firms can better manage their cash flow by better managing  the accounts payable process.

 

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Categories: Best Practices, Financial Management, Management, Productivity

Collections – 6 Steps of Best Practices

By on October 2, 2011

I have written several blogs about the topic of Collections in a law firm. I even had a guest blogger from Lomurro, Davison, Eastman & Muñoz, P.A. talk about collecting payments. I have spoken about how software collections “wizards” can help organize and automate the process within the firm. But, how about the actual approach of collecting cash? There are many reasons why clients don’t pay bills; reasons ranging from cash flow worries to perceived bill discrepancies.  Here are a few tips and tricks to be the most effective and gracious “collector” as possible:

1. Wizards. Not to geek out on you here, but using a Collections “wizard” will ensure that you have crossed off all the “warning” options off the list.  Being informed – knowing what has already been done – is the first step to making sure you don’t embarrass yourself, catch someone off guard or risk losing a good client (if, in fact, they are).

2. Personalize. Although there are proven ways to collect from delinquent accounts, often taking into account the type of account and possible cash flow differences can help to get a client to pay. In other words, a small account with a large balance may be handled differently from a large account with a small balance. Sometimes asking a client how they’d like to pay is much better than just the “it’s overdue, pay now” approach.

3. Call. It is often tempting to hide behind letters and emails, but often hearing a human being’s legitimate (or not so legitimate) reason for the delinquency may shed some much-needed light on the subject and the firm may be able to work with the client on some sort of payment plan. This may also help to dispel the collector stereotype and humanize the situation. In addition, a phone call can often gauge whether an account was happy with the firm’s services. Often even corporate accounts can become evasive when it comes to service satisfaction. A phone call may help to get to the bottom of a client’s feelings and why they are avoiding payment.

4. Deal with the fact that you may actually lose the client. Albeit, it is a good thing to get rid of a bad client, but sometimes a good one will jump ship if they feel alienated. This is where good “strategory” comes into place. Try to sympathize with the good accounts and weed out the bad ones as needed. If a client is low on cash, try to empathize with them and work with them as much as you can.

5. Be specific. Make sure you have deadlines set in mind. General promises often fall to the wayside and will eventually frustrate both the collector and the client. When specific deadlines are set, no one can question whether something is late or not. These agreed to deadlines should be confirmed via email and automatically scheduled in the collections software for follow-up.

6. Ask. Be sure to ask clients if they are happy with your services on a regular basis. Giving clients an opportunity to voice their opinions – whether via a client satisfaction survey or even a simple follow-up email – helps to thwart any opportunity to take dissatisfaction out on an invoice. In addition, it makes for happy clients!

Whatever tactic your firm takes, be sure to always keep firm’s reputation in mind – word of mouth travels a long way! Good luck!

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Categories: Financial Management, Law firm billing, Management, Productivity

Leveling the e-Billing Playing Field – Eliminate “Haircuts”

By on September 4, 2011

The e-billing battle plays itself out every day. Corporate clients and insurance carriers look to “enforce” their billing requirements and law firms look to get paid for work done even though it may not fully meet requirements. Lawyers would prefer to just practice law, but it’s just not that simple anymore.

As Mark Herrmann, Vice President and Chief Counsel – Litigation at Aon points out in his article “Inside Straight: The Truth Behind E-Billing”, clients have the benefit of using in-house computers to analyze e-bills more  efficiently, determine items that do not meet the rules and make short pay the firm. He states, “When clients make those adjustments in the world of e-bills, the law firms are typically able to press a button and print a report of the disallowed charges”. The client has the benefit, in many cases, of specially designed e-billing software that spin- through thousands of time and cost entries and kicks out entries that don’t conform to the billing rules.

In my experience, many firms do not have the option of “press a button and print a report of the disallowed charges”. They instead just accept a 2-5% “haircut” on e-bills as the costs of doing business. Till now firms just didn’t have a way of easily scanning hundreds or thousands of bills going out each month for compliance to client rules. It’s not that firms want to send out non-complying bills, it’s just too difficult to manage complex rules on a manual basis.

The solution, automated rules! Law firms can use newly introduced technology to electronically “scrub” bills before submitting them to clients. A flexible rules engine can, just like the clients in-house system, spin- through thousands of time and cost entries and kicks out entries that don’t conform to the billing rules.

Bill Scrubbing technology can level the e-billing playing field and allow firms to submit “clean bills” and eliminate “haircuts”.

 

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Categories: Best Practices, Financial Management, Law firm billing, Management, Productivity, Technology

Changing the Billing Paradigm – Parts 10 (Final): Cover Letters on Client Bills

By on July 24, 2011

Law firms can improve cash flow and increase profitability if they improve their billing process and practices.

 The client billing process, in many firms is based on a slow, painful monthly schedule. Why … because it’s always been that way. In part 1 of this series we identified the nine (9) current painful and costly steps to client billing. In this posting we’ll discuss idea of adding a cover letter to the front of a bill.

The idea of drafting a personalized cover letter and attaching it to the monthly bill is just outright misguided. What is the purpose of the cover letter? An attorney should be communicating with the client on a routine basis, the client should feel comfortable that they know what’s going on.

 The idea of sending a personalized cover letter with each bill does nothing more than slow up the billing process, cost the firm cash flow and may allow the attorney to think that he/she is actually communicating with the client. The fact is, that anything important the attorney needs to communicate to the client probably can’t be put in a general cover letter that passes through the accounts payable department in any case.

 The firm might be better off setting up a policy that says a billing attorney must call a client, on every final bill after a matter has closed or any bill over $xxxx dollars to explain it personally to the client.

 In summary, cover letters on bills really don’t serve the intended purpose and only delay the firm’s cash flow.

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Categories: AFA - alternative fee arrangement, Best Practices, Financial Management, Law firm billing
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