Affinity Consulting Blog


Time, Billing and Accounting…not the most exciting three words when we talk about law firm management, but having a financially healthy law firm will determine long-term success. The financial health of your law firm or any business is ultimately dependent on four simple concepts:

1. Getting the work (selling your product)

2. Doing the work (building the product)

3. Getting paid for the work (collecting the money)

4. Getting more work (marketing)

You need to keep a steady flow in all components and monitor your results to make sure your business is financially healthy. Envision a pipeline with a steady flow of water. At any point in the pipe when the source of the water slows down, a clog occurs in the pipe or even a leak, the output will be affected. All 4 have to work together in order to keep a steady flow. Keeping an eye on the flow is essential to making sure you are maintaining a profitable business. But in addition to keeping an eye on things, the ability to measure the flow is important for profitability. Below are a few areas to consider when creating, monitoring and measuring the flow.

Integrated Legal Accounting software

Legal time and billing software programs of today make life a lot easier for the entire firm when it comes to tracking time and generating bills. Likewise, having an integrated legal accounting package can take you to the highest level of efficiency and reduce room for error or duplication of effort/entry.

Quite frankly, if you don't efficiently collect money for the services you render, you're out of business (pro-bono funded legal service clinics – the exception). Top notch billing and accounting software will help you not only keep your practice organized, but will keep cash coming in the door, help you analyze what types of matters actually make money for your firm, and will keep vendors paid and your CPA from cringing as he/she analyzes your books.

In other words, the right financial software lets you serve clients more professionally, increase your revenues, decrease your costs, and gives you back much of the time previously spent on tedious bookkeeping so you can practice law (i.e. better time management).

Tracking your time

Your time is your inventory “widget”. Lawyers who depend on timekeeping to produce monthly bills, and to be paid, are more conscious of tracking time than those who work in the contingency or flat fee arenas. But even attorneys and staff who work in a firm where almost all of the fees are earned on an alternative fee basis should keep track of time. Here are just a few examples of how keeping track of time will contribute to a firm’s financial health.

• Tracking and billing your time not only significantly improves your chances of getting paid, but also is a communication tool to keep your client informed of what work has been done on his file.

• Outside of keeping time, know how your business is doing financially. What types of cases produce your highest effective hourly rates? Can you earn more money doing wills than corporate work? If you do not track your time, how do you know your effective hourly rate?

• Another reason to record everything you do is to help you calculate what your true cost of production is. By recording everything that you and your staff do, you can better determine how much time and resources are being consumed in the process of completing projects. This will help you determine what you should charge in a flat-fee billing scenario and may also shock you by revealing areas in which you are making little, if any, profit.

Reporting and Analytics

Reporting is an important element to provide key information and identify a restricted flow or leak in the pipe. You can’t report on it if you don’t track and enter it. Some examples of key firm financial reports are:

• Income and Expense (Profit and Loss) – Most law firms typically focus on revenue as a measure of the firm’s financial health. But there is a growing trend among law firms large and small to analyze overall profitability in order to measure their business performance and growth and compensate their lawyers. That is because profitability really is a better way to gauge your firm’s financial position.

• Accounts Receivable (A/R) Reports (who owes you and how long they have owed you). It is much easier to collect on an unpaid balance that goes unpaid 60 days or less than it is to collect on an older balance.

• Average Number of Days to Pay - Do you have a way to track how long it took to get an invoice paid? Clients who are chronically late to pay their bills, or never pay their bills, use up the firm’s resources and stops you from servicing the clients who do pay their bills. Knowing the aging and the average number of days it takes for an invoice to be paid will help you develop a client base with fewer collection issues.

• Work in Process (WIP) (how much you have in unbilled time & costs and how long they have gone unbilled) – Your inventory! Know who you need to be bill and when. If bills are not sent on a regular basis, your cash flow is restricted.

• Retainers and Advance Fee Balances – Regularly monitoring who has funds in Trust or Operating and comparing it against the WIP will allow you to identify clients who should replenish their retainer; this could also reduce the firm’s exposure to “working for free” and potentially cause large, unpaid balances.

• Timekeeper Profitability (how much is collected and/or billed versus the overhead expense of a timekeeper). Are timekeepers fully utilized?

• Budgeting – Any good back office software product will allow you to budget revenue and expenses, realistically mapping out your cash flow for the year. As you print your financial statements month to month, you can see how your firm is fairing compared to the budget number, and compared to prior months or years. This will again help you to identify trends before it is too late.

• Accounts Payable (where your vendors are setup and paid from) – Know who you owe and how much.

Your legal practice is a business and, as with every business, not just its finances but the ability to effectively provide legal services depends on sound management. Better and more effective management means not only greater efficiency and profitability but ultimately, will support more effective delivery of legal services to your clients.

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