Eight Ways to Track Your Firm’s Success
Ann M. Guinn, G & P Associates
Here are eight key bits of information that you absolutely must know about your business. Getting a handle on this information will help you guide your practice to even greater success.
TIP 1: KNOW YOUR REALIZATION RATE
Your realization (or collection) rate is the percentage of fees billed that you actually collect. Divide the fees collected each month by the total fees billed, and you’ll have your realization rate. A healthy realization rate is 90 percent or higher. If your number is lower, check your accounts receivable. You’ve got too much tied up in past-due accounts. Give your realization a much-needed boost by tightening up your collections procedure, taking more money up front, and doing a better job of enforcing your fee agreement.
TIP 2: KNOW YOUR EFFECTIVE RATE
Use your realization rate to figure your effective rate, or what you really earn per hour. Multiply your regular hourly rate by your realization rate and that will give you your true hourly rate. If you charge $200 an hour but have a realization rate of 75 percent, you actually earn only $150 per hour. You must know this number when you are preparing your annual budget or revenue projections for the coming year. If you bring your realization rate up, your effective rate will get a boost as well.
TIP 3: KNOW WHAT PERCENTAGE OF YOUR REVENUES GOES TO COVER OVERHEAD
To determine this critical number, divide your total annual expenses, less attorney compensation, by your total annual revenues. For a small firm, the percentage of your revenue that covers overhead should be no higher than 40-45 percent. Larger firms should top out at about 60 percent.
In most cases of exceedingly high percentages, I’ve discovered that expenses are rarely the culprit; rather, revenues are too low. The billing rate is not right, or the attorney isn’t working enough hours, capturing all billable time, or collecting enough of what’s billed. Do your own audit of the productivity reports for each timekeeper to determine whether the firm’s goals are being met. Then, do a careful line-by-line review of your profit-and-loss statement to get clear on where your money is going. Between the two reviews, you’ll find your problem.
TIP 4: KNOW HOW YOUR CLIENTS FIND YOU
Tracking the source of all new clients and first-time callers will give you valuable information that will help develop the most cost-effective and efficient marketing strategies for your practice. The person who answers your phone should ask how the caller found your firm and record that information on a log sheet. Regularly review this information to determine which of your marketing strategies is working best and which need to be either scrapped or tweaked to maximize effectiveness. Check out your return on investment for each marketing strategy, and you’ll quickly learn your best source of new clients.
TIP 5: KNOW WHAT YOUR CLIENTS THINK OF YOU
If you think your clients love you because they never complain, think again. Ever had lousy service in a restaurant but offered a perfunctory “fine” when the maître d’ asked how you were enjoying your meal? Then you walked out vowing never to return? Your clients may be doing the same thing. If they haven’t told you how they feel about you and your services, ask them. Ask periodically throughout your representation. You need to know if your clients aren’t happy so you can correct the problem. One of my clients once asked his client if everything was okay. He expected to hear “I’m deliriously happy with you,” but heard instead, “I don’t like that your bills don’t get to me until after I’ve made my budget for the month. I really have to scramble to get you paid.” The attorney asked what would work better for the client, and now he makes sure the client receives his bill about 10 days before the end of the month. He overcame his fear of a negative comment by asking, and now his client is much happier with him.
TIP 6: KNOW HOW LONG IT TAKES YOU TO GET PAID
You mail out your bills, and then the wait begins. But how long are you waiting? The answer is found in a simple calculation. Divide your annual revenues by your year-end accounts receivable. Then, divide that number into 365. The result is the average number of days it takes you to get paid in full. As an example, let’s say your revenue total for last year was $100,000 and your year-end receivables were $20,000. Divide the $20,000 in receivables into your total revenues of $100,000, and the result is 5. Divide 5 into 365 days, and you’ll see that it takes 73 days for you to collect on work billed. The higher the number, the bigger your accounts receivable problem. This really helps you understand what your past-due accounts are doing to your cash flow and should motivate you to strengthen your collections process.
TIP 7: KNOW HOW MUCH IS ENOUGH
Arguably, the most important number of all is your revenue goals for the day, month, and year. “Around” or “approximately” isn’t good enough. You must know precisely what you need to earn each day to run your home and your business. Keep a 30-day expenses journal where you record every penny you spend in your personal life as well as in your business. Don’t forget your compensation. Let’s say your total personal and business expenses are $10,000 a month. If you bill $200 an hour, but your realization rate, or the amount you actually collect, is only 85 percent of billings, you need to bill a minimum of 59 hours each month just to cover your expenses and compensation. There are approximately 22 business days in a month, so you would need to bill at least three hours a day to cover basic expenses. From here, develop a plan to provide the work time needed each day to hit the goal as well as a plan for generating more work to insure you can continue meeting your needs.
TIP 8: KNOW THE IMPACT OF A DISCOUNT
It’s beyond me why attorneys are so fond of discounting their rates. I don’t get a discount for quick payment from my doctor or my hairdresser, and I pay on the spot. My veterinarian just got $660 out of me at time of service, and I still don’t know what’s wrong with my cat. Perhaps they understand the impact of a discount. If your overhead consumes 50 percent of revenues and you discount your fees by 10 percent to encourage quick payment, you must increase your revenues by 25 percent to maintain the same gross profit after the discount. A 15 percent discount requires an increase in revenues of 42.86 percent to maintain the same gross profit. If you discount to encourage quick payment, do you charge the full price if the client doesn’t pay promptly? How does that work for you? If you want to resolve a fee dispute, discount away. On the other hand, be aware that habitual discounting for no apparent reason may be sending your clients the wrong message. Clients tend to look at frequent discounts as an acknowledgment on your part that your fees are too high or that it took you too long to complete a task. Before you write down your next bill, think about what that discount really means to your practice—and to your clients. Do you reward bad clients with a discount while good clients pay full fare? How would they feel about that if they knew?
Stay on top of your numbers and pay close attention to the financial side of the practice. This is a business and you need to treat it as such. When you do, you’ll be rewarded with a financially viable business that provides enough money to meet your financial goals and allows you to provide the level of service you want your clients to experience with you.
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].