What Financial Information Should Your Firm Be Tracking

	By David Roberts Managing Partner Partner In-Charge RBZ Law Firm Services Group droberts@rbz.com
Publication Date: Spring 2003
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In today’s extremely dynamic changing economic environment, sound financial reporting is key. When managing the profitability of a law firm, you need to be able to look at long-term trends to help understand:

1. How to analyze what’s happening today.

2. What you may be able to change.

3. The effect of any changes to the bottom line.

What I am about to discuss may sound basic to some of you, but there are numerous firms that do not track this information. They may have it somewhere on some report, but tracking it on a consistent basis over time is an extremely important part of trend analysis and managing firm profitability. Many times when I am called into a firm to discuss profitability issues, it will take weeks (or longer) to compile the necessary information. This information should be the foundation of your financial reporting. In today’s very volatile economic environment, this trend analysis is even more important to assist management in making critical decisions.

What follows is a listing of many of the specific categories that you should track. For larger firms, you will want to break these categories out by practice groups and offices.

Average Billing Rates – The firm’s average billing rate can be calculated by taking the total dollars worked and dividing this by the total billable hours for the same period of time. You will want to break this out further into partner average billing rates and associate average billing rates.

Billable Hours – The lifeblood of a law firm. Even though there have been many articles written over the years about how everyone is going towards alternative billing and value billing, it seems most of us still live or die by the billable hour. You should break this out by partner, associate, paralegal and total firm. You may also want to reflect this on a per category basis (average billable hours per partner, per associate, etc.).

Work-in-Process (WIP) – There’s more here than meets the eye. You will not only need to track the ending balance of WIP, but you’ll need to track the dollars coming in and going out of WIP (dollars worked and dollars billed) along with write-downs and agings.

Accounts Receivable – Similar issues as with the work-in-process. You should track the end of period (usually monthly) balance of accounts receivable, the dollars going in and out (dollars billed and dollars collected) along with any write-offs and an aging.

Headcount – You need to track full-time equivalent (FTE) headcount by partner, associate, paralegal, secretary/wp and other administrative staff. For example, if an associate starts work mid-month, they would be counted as a .5 for headcount. You would utilize a similar methodology for individuals that may work part-time.

It is extremely important to track this FTE headcount figure as accurately as possible because it is used to calculate so many numbers in our report (i.e., average billing rate, average billable hours per associate, leverage, cost per lawyer, etc.).

Debt – This is the total debt on the firm’s balance sheet which usually will consist of term loans, lines of credit, capitalized leases and loans from owners.

Draws (or Shareholder Salaries) – This amount should be the total draws paid to partners or salary paid to shareholders during the period. You may want to break this down into equity and non-equity.

Ending Cash Balance – This is the aggregate amount in all cash accounts excluding trust accounts.

Expenses – This should be pretty simple. It will be the total expenses on the income statement, less any shareholder salaries. You should also consider looking at the magnitude of partner perks. If significant, these perks should be excluded from expenses.

Now that the basics are out of the way, let’s see how this all plays out. From gathering the above information, you should be able to calculate the following:

Gross Revenue Worked Per Lawyer – This would be the value of time worked divided by the number of FTE lawyers.

Gross Revenue Collected Per Lawyer – This would be the gross fees collected divided by the number of FTE lawyers. Costs reimbursed by the client should not be part of this number.

Average Cost Per Lawyer – This is the total expenses excluding all lawyer salaries (and sometimes paralegal salaries depending on the level of work the paralegal performs).

Realization – True realization is the dollars collected divided by the related dollars worked at firm standard rates. Many firms use a quicker, easier method which is to take the dollars collected in a given period (say a month) and divide this by the dollars worked in that same month. For example, if the dollars collected are $90,000 and the dollars worked are $100,000, then the realization would be 90,000 divided by 100,000 or 90%.

Leverage – There are many leverage statistics, but the most common is the associate to partner leverage. For example, if your firm has 20 associates and 10 partners, then the ratio is 2 to 1 or two associates for every partner. You can also measure secretary and word processors to lawyers and support staff to lawyers.

Net Income Per Partner – Start with the net income of the firm. Take out all partner/shareholder compensation, benefits (such as payroll taxes and pension contributions) and any individual partner/ shareholder perks (such as autos). Now divide this higher net income number by the number of partners or shareholders and you will have net income per partner.

Number of Months Invested in Accounts Receivable – Take the ending balance in accounts receivable and divide this by your average monthly billings (average monthly billings can be calculated by taking the total of the prior six months’ billing and dividing this by six). You can also do this for work-in-process (you would use average monthly worked rather than average monthly billings).

Now that we’ve defined most of the categories, let’s take a look at what this report looks like. First, break out and put in headings for the major categories such as: Firm Statistics, Billable Hours, Headcount, WIP & AR, Income Statement and Per Lawyer Statistics. Second, decide what specific information will be meaningful to you in managing the firm. Don’t forget, you’re going to track this information for years! Third, and maybe the most difficult, try to have this information on one page. (To view a sample chart, please go to www.rbz.com/Publications_RTB_chart.htm).

A major component to analyzing and managing profitability is having the availability of the necessary information – the “Foundation” (as I referred to it in the beginning of this article). By tracking the above information on a month-by-month and year-byyear basis, you will have much of the necessary statistical information already available. There are obviously other categories (or more detail in the above categories) that a firm may want to track. This will give you a very good start to which to add to and modify.