Redwood Analytics

The Law Practice Business model illustrated below is an important tool for forecasting and estimating per-partner income. It is the standard by which one firm can be compared financially to another. While the model explains the key factors influencing partner income, it ignores the timing difference between doing the work and collecting the result of that work. For a firm with an ongoing moderate growth and consistent billing and collection practices, the omission of the timing factor may not be material. However, it is important to note that the cash distributable to the partners is influenced by more than just the five variables (leverage, price, productivity, realization, and margin) used in the Law Practice Business Model. An increase or decrease in either unbilled fees (Work-In-Process) or billed but uncollected fees (Accounts Receivable) can have a material impact on funds available for distribution to the partners.

Both work-in-process (unbilled fees) and accounts receivable (billed but uncollected fees) need to be on management’s radar. Let them get out of control and distributable income will take a hit; reduce them through improved procedures and partners will take home a bonus.

The role of work-in-process related to distribuable income was covered in the prior post Unbilled Law Firm Fees (Work-in-Process). This post will address accounts receivable. According to the Juris Law Firm Economic Survey for 2005, the average midrange law firm has 76 days of billed but uncollected fees receivable from its clients. From experience, we know that the likelihood of collecting those receivables decreases over time. Deals get made to encourage clients to finally write a check. Those last in line for payment are the most likely to suffer bad debt losses. Clients less inclined to value services provided months ago can demand an adjustment prior to payment.

As in the case of work-in-process addressed earlier, there two approaches to measuring the firm’s billed but uncollected fees (accounts receivables):

For internal management purposes, the best tool is an Aging. For example, what percent of the firm’s receivables is less than 30 days old, 60 days old, and 90 days old and more than 90 days old? How quickly a client pays its bills is often influenced by practices and procedures within the law firm, which can differ from attorney to attorney. Thus, in addition to firm-wide aging information, firm leaders need aging information by office, practice class, billing attorney and individual client and matter.

Surveys and benchmarking services tack the metric Fee Days Outstanding or Days to Pay as the indication of a law firm’s collection efficiency; therefore, in order to gauge a firm’s performance relative to the completion, it is important to track Days to Pays for comparative purposes. Since most midrange law firms report fee revenue on a cash basis, the metric normally uses fee collections for a twelve month period divided by 365 to arrive at the value of one day's billings. That divided into the dollar value of billed by uncollected fees (Accounts Receivable) yields the number of Days to Pay.

Dashboards like that shown below from Juris provide a continuous field-of-view over key performance metrics that influence law firm financial performance including those for accounts receivable and work-in-process. Dashboards can be tailored to each responsible leader in the firm. The managing partner can have a firm view while a particular billing attorney’s dashboard might be limited to client/matter and operations for which he or she is responsible. The key to dashboard technology is that when metrics are off target, the responsible individual can drill down from the dashboard to detailed information as needed to identify the problem point and take corrective action. The top-down view provides the busy attorney with instantly digestible information for continuous situational awareness and with power drill-down business intelligence to reach actionable information.

Shortening the collection cycle has a significant positive impact on distributable income to the owner/partners. Improving performance first takes measurement. Measurement needs to be backed up with planning, goal setting and holding people accountable. For a check list of ideas to speed up the billing and collection process, read the prior post, What to do When Clients Don’t Pay?

All billing systems will provide law firm leaders with aging information in some form. On the other hand, Days to Pay is often not available as a standard feature. Your vendor may, however, offer custom features for an additional fee. If not, you may wish to use the attached copy of the spreadsheet shown below to measure and keep the Days to Pay metric front and center on a monthly basis.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.