This is being written in the wake of some of the most traumatic weeks on Wall Street. Lawyers who’ve relied on real estate purchases, sales and refinances have seen their business slow down dramatically. Bankruptcies and foreclosures are back on the rise. Business analysts keep warning the situation still could get worse with more large bank and business failures. While we can’t control or even influence most of these trends, we can ensure we’re taking steps to keep our own business financially sound.
Most law firms are small businesses, with ownership typically is controlled by an individual or several partners. Before examining your finances, consider who your clients are and what mix of services you offer them. If you specialize in one area of law, is it recession-proof? As a business owner, you should be projecting a few years to see where your practice is headed and make adjustments before you’re forced to weather changes in the marketplace.
For example, when I first began my business, much of my work involved installing, creating macros and merge templates, and training on Word Perfect 5.1. With the introduction of Microsoft Windows, WordPerfect began its gradual loss of market share. While there still are many law firms using WordPerfect, the vast majority switched to Microsoft Word years ago. With that transition, work for customization and basic training also evaporated, as younger lawyers and staff already were familiar with Word from using it in school. If my business hadn’t adapted to these changes and began to offer other services, I would have been in real financial trouble. Lucky for most of us, smaller businesses can adapt faster to market changes than our larger counterparts. So, with the economy in turmoil, it’s a good time to review the services you offer and ensure you’re responsive to clients and potential clients’ needs.
When I was more active in the American Bar Association’s Law Practice Management Section, I listened to countless debates about whether a law firm should consider itself a business or not. (I’m still not sure what the alternative was since law firms, whether they admit it or not, have always been businesses.) The nature of the debate was whether lawyers should implement business-like policies or operate on time-tested traditions.
Tradition-minded lawyers referred to law as a “practice” and bemoaned the introduction of concepts like budgets, marketing and measurement of productivity. The pioneers of the Law Practice Management Section correctly predicted that when times got tight, good business practices would protect the firms that followed them.
As a consultant, I’ve found that more of my time is spent doing remote support sessions with clients. It dawned on me recently while watching status bars fly across the screen that I could be reading e-mail or doing other billable work while assisting clients. (Generally, when I am doing other work, I don’t bill the client being assisted remotely for that time if I’m able to work on other tasks.) A second monitor allows me to keep an eye on my client’s system while tending to other tasks. I’ve also found that while working on proposals, I can have my document on one screen and check pricing on the internet on the other.
It’s easy for law firms to make money when they can keep raising rates and find clients who’ll pay. It’s a lot harder to make a living if no one wants to buy what you’re selling or can’t afford your services.
To delegate or not
Minding your firm’s finances is something many lawyers prefer to delegate. I’ve heard many lawyers say, “If I wanted to be an accountant, I would have gone to business school or gotten a CPA instead of a law degree.” In too many firms, support staff is trusted to print and sign checks, pay office bills and otherwise represent the firm financially without sufficient oversight from the attorneys. At a bare minimum, every partner should review monthly bank statements and credit card statements to ensure all charges are legitimate.
While law firms often have staff members or even partners who help themselves to the firm’s business or trust accounts, sometimes it’s not the staff that’s the problem. Recently, I found two erroneous charges on my business credit card. By calling both the vendor and credit card company, I learned that someone (not in my office in this instance) had managed to steal my credit card number to purchase about $80 worth of services. The company was able to tell me it saw a pattern of purchases that looked fraudulent and was sending these transactions to its legal department as part of a fraud investigation against the individual who used my card. While the amount was small, had I not been watching or had delegated it to someone else, I could have ended up with months’ worth of small fraudulent charges before I noticed.
The longer someone works with us, the more we tend to trust that person. Sometimes, though, we get rude and expensive surprises. The malpractice docket is full of examples of people helping themselves to escrow monies or otherwise taking money from law firm coffers that wasn’t theirs.
While firms should purchase insurance to cover for errors and omissions, employee theft and malpractice, some simple safeguards can help limit exposure. It’s critical to have sufficient oversight and checks and balances in place to ensure no one person reviews and pays all the bills and performs the bank reconciliations on those same accounts.
Solid budgeting
Unless you graduated from law school recently, you weren’t taught about running the business side of a law firm. You studied contracts and civil practice, and maybe took accounting for lawyers, but never learned about setting a budget. No matter what areas of law your firm practices, you should be able to develop a budget or set of estimates of projected annual income and expenses.
A budget will help visualize what it will take from a revenue side to make the income you hope to bring home. Seeing it on paper will help to determine what income is needed as well as what expenses can be controlled to better meet your firm’s financial goals.
Along the same lines, few, if any, small law firms have a business plan or consider their business strategy for the next five years. Again, putting your goals in writing can help you better evaluate and refine your actions to achieve those milestones. Over the past few decades, lawyers have relied on their ability to raise their rates to generate more income. While the chaos in the financial markets initially will hurt larger firms — since it is their clients that either have closed up, been purchased or are on the skids — small firms aren’t immune and won’t be able to rely on rate increases to weather bad times.
Similarly, cutting expenses takes thought and care. One client recently asked me about having the lawyers enter their own time in hopes he could eliminate the payroll cost for a receptionist who, in addition to answering the phone and greeting visitors, did the data entry for the attorneys. As I explained to the attorney, the nature of his practice was such that clients would go elsewhere without the personal touch when they called and that maybe he should be looking closer to see whether all the attorneys were bringing in enough revenue to justify their salary and benefits before eliminating the lowest costing staff person.
Marketing game plan
Marketing a small firm often seems to be limited to placing advertisements in journals, having a website and a firm brochure. Having a real game plan that brings in the type of business you want only happens if it is thought out and planned. While I have seen many law firms produce newsletters, I would venture that few of these efforts result in the new or repeat business the firms hoped to obtain. Placing your firm’s name on a pre-printed general newsletter that doesn’t address the needs of your clients or potential clients won’t result in generating quality new business. Do your homework and take the time to figure out what you should be doing and who you are targeting.
In managing your law practice, you should make ample use of your firm’s billing and accounting programs to examine both your revenue and expenses. Make sure you’re asking for and getting the reports and information you need from your financial software to allow you to make intelligent financial decisions.
Do you regularly compare this year’s earnings and expenses with previous years? Do you regularly review your firm’s accounts receivable report and have someone follow up with clients who haven’t paid in more than 30 days? How often do you discount or reduce client’s bills? Do the partners regularly review the firm’s financial statements like balance sheet, income statement, cash flow statement? In short, do you know what money is coming into your firm and how it gets spent?
Comparative analysis
Finally, do you know how your firm compares to others similarly situated? An entire industry has grown up that measures business analytics. These companies collect and interpret data from similar entities to help businesses make better decisions and optimize their procedures.
Redwood Analytics and Juris, both now owned by LexisNexis, have been collecting law firm related data and helping firms use this information to better position themselves competitively. With this data, they’re able to see what successful firms do better than their counterparts, controlling for factors like firm size, community demographics, etc. You don’t have to be a subscriber to tap into this information. Take a look at www.morepartnerincome.net to get started in learning more about managing your firm’s financial success in these trying times.
