Managing a law firm can be like driving a car. You’re cruising along the highway assuming everything’s fine until a warning light on your dashboard comes on telling you there may be a problem. The problem may be a simple fix or an expensive repair. Like your car, law firms need a financial dashboard to warn firm owners when the wheels start veering off the road.
A summary financial management report should be prepared monthly comparing current month and year-to-date results to prior year results and to budget. For example, if the firm reports July, 2015 collections of $100,000 and January-July, 2015 year-to-date collections of $700,000, these amounts should be compared to collections for the same periods in 2014. They should also be compared to year-to-date budgeted numbers for 2015.
There are many types of key performance indicators (KPIs) available to monitor the firm’s financial progress. Ten basic KPIs to consider include:
- Profit/loss results – this includes fee revenue, total operating expenses and net income before equity partner compensation
- Chargeable hours worked and value of hours worked at standard rates
- Billed hours and value of fees billed
- The dollar amount of billed fees collected during the period
- Billing realization % – the percentage of time worked that was actually billed
- Collection realization % – the percentage of fees billed that was collected
- Aged work in process (WIP) – value of unbilled fees that should be billed or written off with attention to balances over 90 days
- Aged accounts recievable (A/R) – value of uncollected fees that should be collected or written off with attention to balances over 90 days
- Turnover – the number of days it takes to bill and collect the firm’s accounts
- Average billing rate – firm’s effective billing rate based on fees and hours billed
These numbers are easily available in the firm financials and time/billing reports. You may want to break them down further by category of full-time equivalents (FTEs) timekeepers (partners, associates, paralegals).
You don’t need to be a CPA to manage your firm’s finances. Too many firm owners focus only on how much cash is in the bank and daily collections. By tracking financial results, you can steer clear of any major potholes and reach your destination safely. If you need help, please contact Saville at (214) 922-9727.