Parsley Sage Rosemary & Ginsburg llp
“always a reasonable result for a reasonable fee, always”
August 25, 2012
Managed Financialcare for the Law Firm – Patient Heal Thyself
Regular health exams and diagnostic tests contribute to a longer, healthier life. They help detect problems early, when chances for corrective lifestyle changes, treatment or cure are best. My primary care physician has me on a 6-month schedule, alternating between a routine office visit and a more thorough, rigorous annual physical. Additionally, I see an occasional specialist as needed. The goal is to maintain me in peak performance for my benefit and for my family, partners and clients who depend upon me.
What about a managed financialcare regime for the law firm? There are numerous opportunities to check on the financial wellbeing of the law firm. A financial bill of health is important for multiple stakeholders – clients, lawyers, and staff. Attention to the financial health of the firm is a shared responsibility of the administrator, managing partner and each partner in his/her individual capacity.
Monthly Routine Financial CheckupsThe normal business cycle of recording time and invoicing clients provides a natural opportunity to perform routine financial self-examinations. The monthly production and financial reports are a good place to start looking for possible unhealthy symptoms.
· Are the firm’s timekeeper’s appropriately engaged on client work as demonstrated by the billable hours and billable hour time value reports?
· Are invoices being produced and collected on a timely basis according to the aging reports of unbilled time/costs and uncollected accounts receivable?
· If the firm has a budget (and it should), is the firm’s actual financial performance inline with the year-to-date budget projections?
To avoid unpleasant surprises (or bad tasting medicine) at year-end, it is good practice to expand upon the routine monthly examinations at least four times a year. For planning purposes, these expanded assessments should occur in April (following the end of the first calendar quarter), July (end of second quarter), early October (immediately after receiving 3rd quarter financial results), and mid-November (before Thanksgiving and the last month of the year). In addition to the questions covered in a routine monthly checkup, the firm should consider:
· Is the budget still viable? Have there been significant operational changes not contemplated in the budget (e.g., additions/departures of personnel; unanticipated major expenditures)?
· Is the firm’s year-to-date financial performance on target to achieve the partners’ compensation goals?
· Has cash flow matched budget projections? Are firm liabilities (e.g., bank borrowing; total unpaid vouchers) inline with the budget’s cash flow forecast?
· Is the firm’s cash balance growing in anticipation of funding last year’s pension/profit-sharing contributions, bonuses and other major obligations in the normal course of business?
· Is the firm on track to meet all of the financial covenants required under the terms of its borrowing agreements?
· Are the timekeeping and client billing procedures operating on schedule?
· Is the firm providing the types of schedules required by its bank and other lenders?
Annual Financial MRI
The annual budget process (which should begin early in the 4th quarter) is an opportunity to assess the financial strengths and weaknesses of the organization as a whole. It should be a complete diagnostic workup.
· Do timekeeping, billing and collection policies and procedures require attention?
· Are the monthly production and financial reports accurate and timely? Do they deliver informative and actionable data necessary for financial stewardship of the enterprise?
· Are bank accounts reconciled on a timely basis and is client trust accounting compliant with bar rules?
· Are lawyers spending too much time on back office financial issues to the detriment of tending to current client issues and attracting new clients to the firm?
· Are individual timekeeper rates commensurate with both salary expectations and reasonable assessment of value provided?
· Are partners’ capital and firm debt[ii] levels appropriate to provide cash liquidity without resorting to late payment penalties and adverse credit reports?
· Is the firm happy with its payroll service provider; its profit-sharing/401k service provider?
· Is it time to take a new look at the firm’s life, disability and health insurance? Is the firm happy with its insurance agent? Is agent providing additional value, advice, direction, cost-savings ideas/solutions?
· Is it time to reevaluate the firm’s errors and omissions insurance program? Should the firm consider increasing/decreasing risk retention?
· Does the firm have an exit strategy worked out for key partners?[iii]
· When was the last time the firm looked seriously at its partnership agreement? Is the arbitration clause up to date? Does the agreement spell out rules regarding a partner’s withdrawal and obligations to make sure the firm gets paid for continuing work (especially with respect to contingency cases taken)?
· Does the firm have a strategic plan and do all the partners understand their roles in fulfilling the plan’s goals?
· Is the firm’s compensation plan working; achieving the desired results?
This is not an exhaustive list of potential questions, but you get the idea.
Not Necessary to First Consult your PhysicianThe scariest things about all those pharmaceutical ads on TV are the worrisome disclaimers and the admonitions to check with your physician before taking any affirmative steps. (Neither encourages me to get off the sofa and find out more about the product.) The good news is a law firm’s new financialcare regime can begin without consulting an expert.
The first step is to consider whether “things” are working the way the firm believes they should work. Paraphrasing again: If the firm’s financial operation isn’t hitting on all cylinders, “[you’ll] know it when you see it....”[iv] An expert is contraindicated for this first step or to self-prescribe some initial corrective action (like regular exercise, smaller food portions and a daily “baby aspirin”). Before calling in an expert, consider this malapropism: First step is for the patient to heal thyself; if that doesn’t work, then make an appointment. After all, there are a lot of people depending upon the financial wellbeing of the law firm.
[i] Tom Peters, Thriving on Chaos, p. 3 (1988). Peters gained fame with the 1982 publication of In Search of Excellence. He updated Chaos in 1995 and Excellence in new additions in 1989, 2004 and 2012. I once joked I decided not to read In Search of Excellence because it obviously had no application to law firms, but that when Thriving on Chaos came out – it was obviously aimed at law firm managers. Sadly, the joke is no longer funny.
[ii] I’ve always taken the position that debt is like cholesterol – there is good debt and bad debt. Good debt includes equipment leases and a reasonable line of credit to accommodate cash needs early in the year following payment of prior year’s bonuses if first quarter collections may be lagging due to the prior year-end collection push. Bad debt is extraordinary borrowing to supplement high partner draws.
[iii] Succession/buyout planning is one area where procrastination can have dire long-term side effects.
[iv] Justice Stewart’s concurring opinion in Jacobellis v. Ohio, 378 US 184 (1964).