UTILIZING FINANCIAL AND MANAGEMENT REPORTS TO ENHANCE REVENUE AND PROFITABILITY

by Joel A. Rose
 

This article describes some financial and management reports which, if properly and systematically prepared and utilized throughout the year, will keep the managing partner, management committee, partners and the administrator aware of their firm's financial affairs to provide for the expected economic results at year-end. It must be emphasized however, that no report will be of any benefit unless it is used as a basis for action. The report itself will not create action. Action must be initiated by an individual or governing body, whether it is the managing partner, management committee or administrator.

Time, Costs and Billing Reports

Time management is financial management, and as far as a law practice is concerned, time is money. The more effectively lawyers and paralegals manage their time, the greater control they have over their financial well-being, and to that end an informed management leads to effective management. Attorneys cannot manage their time unless they are informed about areas where they can eliminate waste or improve efficiency, and concentrate on matters that contribute to the profitability of the firm.

Time records must be maintained as a matter of routine, on a daily basis. Assisted by in-house computer systems, partners in most firms are able to obtain billing work sheets with all necessary diary data. For example, a billing partner can obtain a billing work sheet containing all time recorded by attorneys and paralegals within a one day time lag. Therefore, it is imperative that all attorneys and paraprofessionals actually submit time reports on a daily basis. In this regard there are two reasons firm management needs to know when timekeepers fail to submit their time: (1) to follow-up on delinquent timekeepers, and (2) to inform the billing partner that the time of certain attorneys and paralegals is missing, so that this information may be obtained prior to rendering the bill.

Slow Billing Not Unusual

Many lawyers are slow to bill clients for work performed. They frequently defer the billing of work well beyond the time at which it could reasonably be billed. A well-conceived management information system should require lawyers to periodically focus attention on unbilled work and costs. Every client matter should be assigned to a partner who will be responsible for billing that matter. Each month this billing partner should receive a computer report showing the name of the client, client matter, billing cycle (monthly, quarterly, or annually) date the last bill was sent, whether it was fully paid, time-dollar value charges for the current month, all unbilled time charges, and the same information for disbursements. He or she has only to return this report to the accounting department, requesting a billing work sheet, to obtain all of the detailed information required to bill the client.

The managing partner, management committee and administrator should receive additional computer reports to assist in keeping track of partners' effectiveness in satisfying their billing responsibility. One type of report usually contains a summary of unbilled time and costs by billing partner, and enables the reader to quickly check which partners have accumulated significant amounts of unbilled time. This report also shows whether the firm's total inventory of unbilled time is increasing or decreasing. Another important report shows the unbilled time by work category. To accumulate information for this report, each new matter accepted by the firm should be classified in a predetermined work category, and input into the data processing reporting system to provide information about unbilled time and costs by specific types of work. A fourth type of report shows unbilled time or costs over a predetermined dollar figure.

Working Capital Needed

At this point, it should be noted that the decision on whether or not to bill needs to be given careful consideration, since working capital is required to carry unbilled time. The smaller the amount of unbilled time, the fewer demands imposed on the firm for cash, and the more likely that the unbilled time can be billed and collected at full value. When cash is not tied up in unbilled time, distributions can be made to partners on a regular basis. The greater the delay in billing or the amount of time charges which remain unbilled, the less likely that the firm will collect the full value for the time of its attorneys and paralegals. Conversely, the more promptly a matter is billed, the more likely that the firm will collect the full time value. Also, billing clients in smaller amounts, but more frequently, often produces larger overall fees.

To enable ready identification of clients and matters which are not being given the necessary billing attention, a special computer report should list matters where the unbilled time or costs exceed a predetermined dollar figure. This report enables firm management to pinpoint items requiring special attention. With this type of report in hand, the managing partner can talk to the billing partner and obtain a bill, or at least some justification for further delay in billing.

Other Suggested Reports

Two other recommended management reports are those where there has been no time recorded, or where no bill has been rendered to the client for a predetermined period of time. The cut-off period for this report could be four months, eight months, or some other interval. It is important to identify the matters which are inactive. A firm can end up writing off a large part, or even all time devoted to a matter, because of the failure of attorneys to bill promptly. Management reports should not be cluttered with a lot of detail, they should contain summaries of data. They should enable anyone to readily identify the problem areas. Detailed information is always available on other reports as required.

Another important area where slippage can occur is in billing for costs advanced. For all intents and purposes, the clients are "using" the firm's money. Even clients who insist on being billed annually or at the end of a case should be billed to pay costs advanced at regular intervals. There is no justification for not billing costs advanced at least quarterly or every six months, or when they exceed a reasonable amount.

Firms should encourage their clients to pay lawyer costs directly, e.g., litigation expenses such as costs of deposition transcripts, expert witness fees and the like. To the extent that clients are not willing to pay these costs periodically, the firm should be concerned about whether they will honor its bills for services rendered.

Accounts Receivable Reports

Management efforts do not end with the billing of time and costs. After bills are submitted the accounts must be reviewed until paid in full. To aid in this surveillance, the managing partner, management committee and administrator need information about accounts receivable to enable them to identify delinquent accounts. Firms should age their accounts receivable at set intervals, e.g., thirty, sixty, ninety, 120 and over 150 days.

There is no one way to collect overdue accounts receivable. The starting point is with the billing partner. After appropriate reminders by the managing partner or management committee, the responsible billing partner should determine the proper type of follow-up action to collect the receivable. Different firms employ a variety of approaches. In some situations it may be sufficient to send a reminder statement. Most firms can routinely print such statements. In other cases it may be desirable for the billing partner to telephone the client. In some extreme cases a personal visit to the client is needed. If the billing partner is unsuccessful in collecting the outstanding receivable, the delinquent account should be referred to the managing partner for collection, or to a designated "collection partner" for appropriate follow up. In some instances firm may decide that it will not perform any more legal work for that client (assuming of course that if this is a litigation matter, the firm will be allowed to cease work on that client's file).

If the type of financial information described above is received in a timely fashion, it can be used effectively. Improving the timeliness of the billing cycle or reducing the inventory of accounts receivable cannot be achieved unless a firm has the necessary data. The managing partner of a mid-size law firm we recently worked with said, "You cannot achieve prompt billing or reduce accounts receivable unless you have the necessary information before a ripe situation rots." Financial information is basically a management tool. Only the reports that are necessary for lawyers to discharge their billing, or other responsibilities should be disseminated to the partners as a whole. Lawyers not charged with management responsibility generally do not want
to be burdened with having to read four or five inches of monthly computer print-outs.

Profitability Reports

Perhaps the most sensitive area of management activity is the evaluation of attorney performance and results. The best results are achieved only when lawyer management and the administrator are given financial and management data so that they can reach informed conclusions in order to manage the firm wisely. Traditionally, clients have always been evaluated by several standards. One important standard is whether the client matter produces fees above or below the recorded time-dollar value. The managing partner, management committee and administrator need to know whether clients, and specific matters handled for them, are paying their way in terms of billable and collectible fees. This information, typically presented on a consolidated profitability report, shows fees received from each client, broken down by billing the partner and also alphabetically by client. The report shows the time billed, time removed from the books, difference between the time billed, time removed from the books, difference between the time billed and time removed, and the variation above or below the time-dollar value charges. Firms having in-house computer systems can produce similar data for costs advanced.

Since some lawyers are better at billing than others, lawyer management needs something more concrete than a guess if it is going to confront a partner about poor billing performance. The profitability report provides that something.

The firm should also know how well or poorly it is doing month-by-month in order that firm-wide trends can be identified. A report on monthly time and costs billed, arranged by billing partner and alphabetically by client, shows the time billed, time removed, and amount of profit or costs attribute to each billed and collected item. The same data should be shown for costs advanced. In short, these reports will enable the firm to evaluate its clients, billing partners, and overall effort month-to-month and from a financial point of view.

Billings by Department or Practice Area Reports

Another evaluation of significant importance in planning the firm's future development is the analysis of billings by work category. This analysis highlights types of work which the firm may or may not wish to emphasize. Initially, all clients should be classified as individual, corporate, etc. Then each client matter should be further classified into predetermined departments or practice area work categories. Periodically, the managing partner, management committee and administrator should receive a report on the profitability or costliness of these work categories. A report for individual clients with a breakdown by work categories. A report for individual clients with a breakdown by work categories shows which type of work produced billings in excess of the time-dollar value and which did not. For example, the preparation of individual tax returns is an area where many firms lose money, and therefore, may be the type of work that should be de-emphasized.

Many attorneys provide "general or personal representation" to selected clients. Some methods should be employed to provide specific information on this broad category. One report that could be provided may include the names of clients listed alphabetically, time billed, time removed and profit or costs year-to-date. Again, the reader can tell at a glance whether the work in any given category is profitable or not. The managing partner and administrator would also be able to determine which clients contributed most to the result and whether it was good or bad.

In addition to evaluating its clients and types of work, the firm should also review its lawyers (individually and by group). This is a most sensitive area, since being judged by one's peers can be traumatic. It would be naive to suggest that the evaluation is simply a matter of looking at the fee-producing hours which a particular lawyer records. There are many other factors that should be considered in making any meaningful evaluation.

Dissemination of Management Reports

Most firms have addressed the questions of how much financial and management information should be disseminated and who should receive this data. In many larger firms selected individuals such as the managing partner, members of the management committee, department heads and the administrator may receive a monthly report of the time performance of all timekeepers, individually and by practice area. Billing partners receive monthly reports of the time performance of all timekeepers, and billing and receivable status of all client matters for which they are responsible. One such a report each timekeeper's actual time for the month and year-to-date should be compared with his or her budgeted income figure. From this report department heads can concentrate on workload distribution by assignment of work.

It is also helpful to have fee producing hourly-time information reported for all of the departments in the firm in summary fashion. This information can be quite valuable in long-range planning. It is possible to see which departments are overworked, which need more associates, and where there may be some slack.

Non-Billable Time and Administrative Time Reports

A monthly report showing predetermined categories of nonfee-producing time should be prepared in order to evaluate a firm's progress toward its overall objectives. From this report the managing partner, department heads and administrator can determine whether the firm is achieving its goal of increasing activity in the field of lecturing, writing articles, and other forms of business development, etc. Reviewing this report will determine whether the firm is maintaining a substantial commitment to the bar and law related organizations. For example, suppose a firm had decided that for every ten hours of fee producing time, one hour should be devoted to pro bono work. Work in this category would highlight the ratio of pro bono time to fee producing time. It is also possible to determine whether the firm is increasing or reducing the amount of time devoted to firm administration.

The "right" kind of management data will permit a law firm to effectively evaluate its success in attaining a variety of goals. If a firm decides that it wishes to grow at a specific rate, it may very well have to exercise some selectivity in the work it accepts. There is no better way to do this than to include the most profitable work and exclude the least profitable. Without the type of management reports described above, the selection process becomes little more than guesswork. Good firm management should strive to minimize the guesswork when attorneys and administrators are attempting to manage their financial affairs.

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