A small law firm with three
full-time attorneys and four support staff had annual revenues of approximately
$375,000 on a cash basis. The firm was operating at a loss, yet all of the
employees were diligent and hard-working, and the firm had an excellent
reputation for the quality of their legal work.
Problem 1: Cash Collection
After conversations with the
firm's personnel and reviewing the firm's financial statements, only 80-90% of
the work they billed was actually being paid by clients. While this seems
low, it is not uncommon in professional services firms, particularly law firms.
At the time our consultant came in, the firm had $100,000 is past due receivables, 90% of
which was over 90 days old. Even assuming an 85% collection rate, this
translated into $66,000 a year in lost revenues ($375,000 / 85% collection rate
= $441,000 billed fees - $375,000 collected fees = $66,000 uncollected fees).
One of the first things our
developed was a two-pronged approach to improve collection efforts. First,
we developed a screening system for them to use to identify clients likely to
have payment delays. Work performed for financially stressed clients was
billed more frequently and in smaller amounts, and the total expected costs of
all work was shared with clients much earlier in the process.
For example, divorces can be
accomplished for less than $1500, but only if uncontested and both parties are
willing to work together amicably. If either side chooses to fight, the
cost can easily exceed $10,000 or more. Unfortunately, all that most
clients heard was $1500, not "or more..." By being more upfront with a
prospective client as well as asking the client the right questions, the firm
was able to make better estimates of the actual costs for a specific client, and
then create a working/billing arrangement that fit within that client's budget.
The second prong to solving
this collection problem was a revised collection procedure that starts with
mailing invoices to clients and carefully tracks and logs all conversations with
past due clients throughout the entire collection process. We developed
scripts for the office assistants to use, as well as form letters, and even a
timeline of when to call and when to mail for past due clients. If you
wait until an account is over 90 days past due to begin collection efforts, the
chance of getting paid is low. If, however, you start the process on Day
1, your chance of getting paid is very high.
Example: "Thank you
again, Mrs. Jones, for giving us the chance to work with you in developing your
new estate plan. I'm just calling to make sure that you received our
invoice yesterday, and that you are happy with the work we performed..."
This is a very easy, friendly conversation to have with a client. It shows
you care about your work and the client's satisfaction, but also stops the
client from saying 40 days from now, "Oh, I never received an invoice from you -
please send me a new one," followed by (usually around day 50), "Actually, I
wasn't really happy about how you handled X - I'd like to you redo it and then
I'll think about the bill later."
Problem 2: Nonexistent Billable Hours
The firm had
three full-time attorneys, and each attorney was billed out at $300 per hour to
clients. In a law firm of this size, attorneys should be averaging a minimum of
1500 - 1600 billable hours per year. At that rate, annual revenues should be
$1,350,000 (1500 x $300 x 3). However, the firm's cash revenues were only
$375,000. Actual billed hours suggest that each attorney was only averaging 400
billable hours per year. Conversations with staff supported this, as much of
the attorneys’ time was spent on class-action contingency cases that, while
potentially resulting in large payouts in the future, were not listed as billed
of the overemphasis on class-action cases, revenues were approximately $1
million less than they should have been, given staff size.
Most of this
revenue shortfall was not due to non-paying clients (see Problem 1 above).
Furthermore, based on observing the attorneys and their staff, none of the
attorneys had significant idle time. This suggested that while they are all
busy, much of their work is spent on non-billable projects such as contingency
cases and class-action litigation.
cases had to be reduced in size and frequency; too many of the company’s
resources were going toward projects with no immediate payout. Not only were
payroll costs high to support these projects, but other fees were significant,
as well. The firm was covering court fees, expert witness testimony, and a
host of other out-of-pocket expenses associated with these projects (by my
estimates, as much as $50,000 per year). Once we put a budget in place, the
firm was able to determine how much of the firm’s time and money should be
allocated to these types of projects.
litigation can be profitable, but generally requires a large firm with extensive
resources and significant cash flow to continue working on a case that might not
result in revenues for years. Creating a budget and planning for contingency
litigation enabled the firm to still maintain a presence in this area of law,
yet manage their exposure to the financial requirements of such actions.
required about two weeks, during which time we identified Problem 1 and Problem
2, set the company up with QuickBooks for an accounting system (the company had
none beforehand), helped them hire a part-time experienced bookkeeper, and
developed the framework for a partnership agreement between the firm's two
took our advice regarding caseloads and withdrew from a number of class-action
cases. The partners then had to make a decision on how to use that time.
While they could have eliminated one attorney plus reduced some of their support
staffs' hours, saving approximately $150,000 annually, they chose instead
to retain the existing support infrastructure and make a commitment to grow the
business. The firm already had sufficient client business to fill some of
the time that had been freed up; previously, the firm had been turning down
existing clients' requests for paid legal work, due to their other (non-paying)
Goals for the project were:
Develop a system to generate accurate, timely financial
statements for the partners.
Uncover the causes of the firm's losses and put a plan in
place to return the firm to profitability.
The end results of the project were:
95% target collection rate on all billed work.
30% target increase in billed work by focusing on
existing clients' needs.
firm gained an additional $145,000 in annual revenues though improved
collections ($45,000), and proper budgeting of caseloads (which enabled the firm
to take on an additional $100,000* in
revenues from existing clients).
revenue was almost entirely profit, as the firm already had the attorneys and
support staff in place. Previously, these individuals and their associated
costs were being paid by the firm to work on non-paying projects; now, their
time and energy would simply be redirected to paying clients.