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The business end of running a law firm

By: JESSICA STEPHEN//July 19, 2016//

The business end of running a law firm

By: JESSICA STEPHEN//July 19, 2016//

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Digging into data is a daunting but necessary task

When it comes to the business side of managing a law firm, reading financial reports can often end up low on a lawyer’s To-Do list.

“It is tempting to just let those reports go to the bottom of the pile,” admitted Lori Dorn, a certified legal manager and director of administration at Madison-based Stafford Rosenbaum.

It’s also probably a mistake.

“There’s just so much you can garner from looking at the data,” said Steve Wingert, a certified legal manager-turned-business consultant. “It’s important to be able to understand the internal metrics, to look at some benchmarking, internally and externally, as opposed to just asking, ‘Are you doing as well as you think you’re doing? Could you be doing better?’ To do better you have to understand the financials. We live in a world of data. The data is probably there. It’s just a matter of knowing what to look at, how to read the data and not get bogged down.”

Knowing where to start is often the hardest part, especially for solos and small-firm practitioners with little, if any, business experience.

“One of the issues is: ‘What do I do with the information? Why would I want to look at this anyway?’” Wingert said.

Being able to understand basic business principles can help. It’s that very ability, though, that is often lacking in certain parts of the profession — particularly among solo and small-firm practitioners.

“For firms of any size, attorneys are there to practice law first and foremost,” Wingert said. “So, when it comes to the business side, many want to be involved, need to be involved but simply don’t have the background. And that’s not a criticism. It’s just recognition that these things can be learned. And, I think, a lot of it also can be self-taught.”

Bar associations and the Association of Legal Administrators offer courses on financial education. Some courses can even be found online.

The mere act of logging data can be instructive.

“Just start collecting information,” Dorn said. “Put it on a spreadsheet. Get familiar with the relationships between spending and expenses.”

Break it down

If lawyers still aren’t sure where to start, some might find it helpful to group business data together into categories. Possible classification heads include financials, production and client-base.

Financial statements include balance sheets, income statements — also known as profit-and-loss statements — and statements of cash flow. Production reports deal mainly with attorney work, billings and collections. Client-base data, meanwhile, track work stemming from one-off clients rather than repeat customers.

They each have their role. But, Wingert said, financials are often the best place to start.

“I think it really helps provide a perspective on the health of a firm, understanding your trends over a period of time, really looking at the internal data helps to be able to see when something is really changing,” he said. “Then you can peel back the layers to understand why and what a firm might do differently.”

Wingert worked with law firms in Wisconsin and Illinois for 20 years before starting his consulting business, Nesso Strategies.

“It lets you plan,” Wingert said. “It lets you understand where there’s an issue, where there’s an opportunity.”

Productivity reports also can offer insight into a practice’s financial standing, while providing perspective on larger matters. One question it might help resolve, for instance, is whether it’s worthwhile to drop a type of practice that has a low hourly rate return.

“It boils back to the profitability question,” Dorn said. “You need to make sure the time you’re investing is going to yield a payday that is in line with your budgetary needs. So, maybe you’re billing a high hourly rate, but you’re not collecting it, or maybe you have people who are not being fully utilized? It’s important to look at all those elements to evaluate the profitability of a practice.”

It’s part of the reason Dorn encourages firms to look beyond accounting for their billable and non-billable hours and also keep track of their hourly, contingency and flat-fee work. These sorts of steps can help managers adjust prices and make decisions about whether to hire more lawyers or add staff members.

“You can only make those decisions if you know how much time you’re spending on non-billable work,” Dorn said. “If firms are only looking at average billable hours or gross revenue per lawyer that can be dangerous; it doesn’t measure the firm’s profitability. And it’s really the profits you need to keep the firm strong and growing.”

Also, once work is billed, one helpful follow-up step is to monitor accounts receivable. This can reduce the amount of time it takes to receive payments, which can be as long as 2-1/2 months on average, according to some estimates.

“It’s one thing to put out a bill. It’s another thing to collect it,” Dorn said. “A realization is basically what the firm is actually collecting. And it helps to plan for cash flow. Cash is king. You need cash to operate your business.”

Information overload?

With so much data to comb through, knowing when to pull back is important.

“Some people can get so bogged down in the data it becomes that cliché of analysis paralysis: I’m going to look at the data and keep looking at the data but not be able to do anything with it.’” Wingert said. “You have to know when you have enough data to make a decision.”

Sticking to a report schedule can help.

For financials, Wingert suggested monthly reviews. But, he said, even quarterly reports can be helpful, especially if they could coincide with quarterly tax filings.

“You don’t have to spend a lot of time on it if you’re a small or solo practitioner,” Wingert said.

Whatever the timeframe, be consistent.

“It’s not just about doing the work,” Wingert said. “It’s about understanding your business. Looking at it on a fairly regular basis could be helpful. It can help you see when things start going wrong rather than learning that too late.”

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