Earning What You Are Worth
Ann M. Guinn, G & P Associates
Do you feel like you are not earning at your full potential? These tips help you identify underearning behavior and take charge of your practice to earn what you are worth.
TIP 1: UNDERSTAND HOW AND WHY YOU UNDEREARN
Underearning occurs in two ways. Active underearning is about knowingly doing something that will cause you to underearn. Some examples include accepting clients whom you believe will not be able to pay you, taking on excessive pro bono or volunteer work, pricing yourself low to beat your competition, and discounting your fees. Passive underearning is the result of choosing not to do or failing to do something that would have resulted in you making more money. Some examples are failing to raise your rates, not billing for all of the time worked, procrastinating on tasks, and not spending money on technology that would make you more efficient and productive.
TIP 2: KNOW WHAT YOU NEED TO EARN
When I ask attorneys how much they need to earn, the typical response is, “Enough.” If you can’t quantify what you need to earn, you’re probably underearning. First, you must be clear on the annual cost of running your business and what you need to personally earn. Second, you must know your realization rate—the percentage of fees billed that you actually collect. Divide total gross fees collected by total fees billed. To figure how much you must bill annually to meet your needs, consider this example. If your hourly rate is $200, and you need to earn $203,000 this year to cover your business and personal expenses, with a realization rate of 89 percent, you must bill 1,141 hours to cover your financial requirements.
TIP 3: SET A DAILY GOAL TO CHANGE UNDEREARNING BEHAVIOR
The decisions you make on a daily basis can have a profound effect on your earnings. Make a plan each day that will address an underearning behavior. For instance, a goal for today might be to get your client bills out, call a client about a past-due account, or tackle the client task you’ve been avoiding so you can get it off the to-do list and onto your next bill. Change takes time and work, but the reward is definitely worth it.
TIP 4: RECORD YOUR TIME CONTEMPORANEOUSLY
Waiting to record your time until the end of the day costs you 10–15 percent of your potential billable time. If you work six hours a day at $200 per hour and fail to capture your time until the end of the day, you’re losing out on $2,640 or more per month, or about $32,000 a year. Make it a point to capture your time as you begin and end work on a task, a phone call, or an e-mail session. If you need a nudge, set a timer to beep every 15 minutes to remind you to record your current time. Use the timer on your timekeeping or practice management software to capture time spent on the computer, as well as on telephone calls or in meetings.
TIP 5: BILL REGULARLY
Calendar time to prepare and review bills every month to ensure you get them out the door on a regular basis. Bill half of your clients on, say, the 5th of the month, and the other half on the 20th. This really helps even out your cash flow every month. And, remember, preparing bills isn’t the best use of your time. Delegate this task to someone else in your office or to your outside bookkeeper. You should always review the bills, but the actual preparation is better handled by a lower-paid employee.
TIP 6: TAKE PROMPT ACTION ON PAST-DUE ACCOUNTS
Review your aged accounts weekly and jump on the accounts that are 31 to 60 days old. The fresher the account, the better your chance of full recovery. Develop a system for dealing with past-due accounts. The starting point is a written fee agreement that clearly lays out your billing and collections policies. Be diligent in enforcing your policies. Don’t be afraid to speak with clients about their past-due accounts. Remember, they signed your fee agreement promising to pay you. One of my clients calls the day an account becomes past due, and that really works for him. Make the first contact by phone. Then, if nothing happens, follow up with a firm letter. Consider a collections agency for seriously past-due accounts. Fire nonpaying clients, as allowed.
TIP 7: REVIEW YOUR BILLING RATE ANNUALLY
If you haven’t adjusted your fees in the last 18 months to cover the increased costs of providing legal services and running your home, you are underearning. To calculate what your minimum hourly rate needs to be, follow this equation: Divide your target revenues—that’s the total of your desired compensation, your share of firm overhead, and any desired firm profit—by the product of your realization rate times your billable hours goal. As an example, target revenues of $275,000 divided by the product of a realization rate of 92 percent multiplied by a billable hours goal of 1,200 gives you a minimum hourly rate of $249. That’s the least you can earn per hour to cover your target revenues. If you lockstep with your competition, you are trying to run your practice using someone else’s financial goals. Remember, your fees don’t have to fit everyone. They just have to work for your target market—and for you.
TIP 8: SPEND TIME EACH DAY MARKETING
Sometimes underearning is the result of not having enough work or the right clients. First, identify the clients with whom you want to work. This is your target market. Second, figure out how they shop for legal services. Third, apply the marketing strategies that will best reach them. For instance, if your target market is estate planning clients, write an article for a nonprofit group’s newsletter on how to provide for charitable giving in your will. Calendar time for marketing every day. Try public speaking, making coffee dates, taking clients to lunch, sending out press releases on firm achievements, volunteering with a nonprofit organization, or joining social networks to connect with referral sources and target clients. Just keep reminding people who you are and what it is you do on a regular basis, and don’t forget to stay in touch with former clients. Remember, it costs 11 times more to get work from a new client than from a current or former client.
TIP 9: DELEGATE NONATTORNEY TASKS
Nonattorney work costs you in terms of billable hours and steals time that could be spent on providing better service for your clients. Let’s say you charge $200 an hour, and outside help for tasks such as bookkeeping, payroll, or IT troubleshooting costs $50 an hour. One hour of your time will buy four hours of help for these non-revenue-generating tasks. It’s a no-brainer that you should farm the work out. Not only is this more cost effective, but the work will probably be done much faster and better when handled by someone with special training for the task. Put your time into billable work, and let someone else handle the nonbillable chores.
TIP 10: JUST SAY NO
Underearning attorneys frequently accept bad cases or clients. If you think the client won’t be able to pay you, refer her away. If a client has unreasonable expectations, you will never satisfy him, and he’s likely not to pay you. Refer him away. If you aren’t the first attorney on a matter, you probably won’t be the last, and you probably won’t get paid. Just say no. There will be other clients. I guarantee it.
ABOUT THE AUTHOR
Ann M. Guinn, practice management consultant to solo and small law firms, teaches attorneys what they didn’t learn in law school about how to run a profitable, efficient, productive, and satisfying law practice. She helps her clients identify what’s working and fix what’s not working in their businesses, with a focus on firm finances, business development, and growth opportunities. Her book entitled Minding Your Own Business: The Solo and Small Firm Lawyer’s Guide to a Profitable Practice is available through the ABA webstore. She is available for consultations at (253) 946-1896 or [email protected].