One of the observations in the 2007 Law Firm Economic Survey by LexisNexis and a focus of the 2008 Survey (in progress) relates to cash flow.  According to the 2007 Survey, all firms had a slow billing cycle.  On average it took firms 170 days from providing a service to collecting payment on it.  In non-service industries that would be a recipe for bankruptcy.   Law firms enjoy high margins, so once the firm initially weathers the 80 or so days before the cash starts coming in, it can survive the slow cycle.  Unless the cycle stops.

How will you know when clients stop paying?  How long do you have until your cash flow reduces to a trickle?  Measuring your billing cycle times is critical in answering these questions. 

Long billing cycles hide what may be slowly killing your firm - inefficiencies, declining business, etc.  If you aren't measuring your performance in converting work to cash, you may not know that your firm is in a crisis for several months, wasting valuable time to act.

Below is an example chart that shows how you can measure the billing cycle by just tracking your unbilled fees, billed fees, and collected fees. 

 To determine unbilled fees, take your work in process that is currently unbilled and not subject to mark-down (to the extent known) for the prior "rolling" 12 months.  Do the same for fees billed and fees collected.  From that you can determine your average days to bill, days to pay and average AR days fees outstanding.  Lowering any of these numbers will increase cash flow and provide additional liquidity to the firm. 

The above takes a look at the billing cycle from the firm perspective.   You can also do this analysis on a timekeeper or practice area.  Tools such as Juris' Active Information can not only track your billing cycle but can also drill down into the "why", exposing inefficiencies that are hampering your ability to maintain liquidity and giving you an opportunity to act to increase cash flow before it slows.

Click on the graphic above to download a spreadsheet to use with your firm's numbers.  You must be a registered user to download content.

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No matter how much you work, until you convert it to cash it is worthless.  The average days in the law firm cash flow cycle (from worked to collected) is 169 (source:  2007 Law Firm Economic Survey from LexisNexis).  Shortening your cash flow cycle has a positive impact to liquidity and thus your cash flow cycle should be measured.

There are two metrics that need to be measured:  days to bill and days to collect.  Determining these numbers on a timekeeper level identifies those timekeepers who are efficient and those who aren't.  The opportunity then is to set a standard and work towards compliance by all timekeepers.

What is this standard?  It depends on the area of practice.  Many insurance companies just won't pay under 60 days of accepted electronic invoice and will only accept these invoices quarterly.  In this case, 150 days isn't so bad.  Some areas of law (many domestic relations situations come to mind)  should, by default, be prepaid.  Any work in process should be billed immediately and applied against the prepayments.  In these cases a cash flow cycle of 60 days should be cause for concern.

Tools such as Juris from LexisNexis' Active Information can help you track this key performance indicator so that you can improve your liquidity. 

We have begun taking submissions for the 2008 Law Firm Economic Survey.  If your firm is interested in participating, please contact Brian by clicking here.

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I received an email from Brendon Carr, foreign legal consultant and host of the Korea Law Blog, regarding a recent post of his, “I Don’t Care What You Charge; Whatever It Is, It’s 15% Too Much”.  The post discusses a request from a new client for an across-the-board 15% discount for his services. 

In my experience working with law firms, discounting is the most difficult thing to change.  Where mark-downs to work performed can be addressed internally, discounting becomes an entitlement to a client.  The only ways to recoup the loss in value is to increase rates at a higher percentage than other clients, pad your hours by billing for things you may otherwise not charge to a client, tie the discount to high volume, or tie the discount to fast payment of invoices  The first two are not conducive to a positive trust relationship with the client.

In my opinion, discounting should be avoided at almost all costs - the exceptions being:

•  In return for high volume of business that compensates for the reduced value of your time.  There is nothing shameful in requesting from a client who asks for a discount to provide estimates of business it will provide and tying the discount to their ability to provide that level of business.  Then you can agree to the discount, but will provide it once the threshold business the client sends you is met. 
• In return for fast payment of invoices.  This encourages fast payment and thus a positive effect on cash flow.

When in a situation such as that of Mr. Carr, several questions come to mind:

• Is asking for a discount up front damaging to the relationship between attorney and client?
• Does mandatory discounting encourage mark-up of hours?
• If it becomes known that your firm discounts, does it create a perception by clients that your firm expects rate negotiation and thus overcharges for its services?

What do you think?  Add a comment below to share your thoughts.

We have begun taking submissions for the 2008 Law Firm Economic Survey.  If your firm is interested in participating, please contact Brian by clicking here.

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 Jim Cotterman, in a recent post, writes on how much debt a law firm should carry:

1. Total debt (including capitalized leases) should be no more than 100% of the net book value of the fixed assets; 90% is okay, but 80% or less is much better.

2. Lines of credit should have a zero balance at year-end and for most of the year.  The credit line should not be used to pay partners or be used as the first source of working capital.  It should be there to augment working capital, covering unusual economic conditions (i.e., negative economic performance beyond one standard deviation of norm).  An available line of credit equal to the funds required to cover one month of payroll (including owners) is one rule of thumb. 

 Cotterman has written on the subject before.  Click here to read an article on law firm debt he wrote in 2003.

As the potential exists for law firms to dip into reserves to offset economic challenges, setting your metrics now to prepare for managing debt can help you avoid financial crisis.

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.

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Partners want all available income distributed every year. But doing so leads to trouble.

One of the toughest jobs managing partners have is the task of convincing partners to leave something on the table every year. Businesses need capital to sustain operations and for growth. James Cotterman lays out the argument for you in his article Firm Capitalization, appearing in the October issue of the online magazine Law Practice Today.

Cotterman even gives you a short quiz to determine if your firm is headed for trouble.

Law firm leaders in midrange law firms often underestimate the impact of cash on their actions. Few really understand the cash gap created by billing and collection practices. In some firms, that gap approaches half a year. The cash gap related to legal staff additions is even greater due to the learning curve and the required filling of the pipeline of billable work. It is quite literally possible to grow yourself out of cash.

Operating cash requirement arise from:

Client Cost Advanced: Client advances can range from about $20,000 per attorney to $100,000 depending on the type of practice

Fixed Assets: The main categories of fixed assets include technology, communications and facilities improvements. The average net investment for midrange firms is around $40,000 per attorney.

Growth: Speaking to a group of administrators in May 2007, Cotterman explained that one of the principle causes for the outflow of funds relates to what Cotterman calls the "pipeline". Even if the additions to the team are immediately fully productive (and they never are), the pipeline has to be filled before income (cash) starts flowing. The typical law firm takes 60 to 70 days to bill for work performed and another 60 to 70 days to collect billed amounts. And as already noted, we aren’t just talking fees. Client expense advances, especially in certain practice areas, can be material. There are only three places for that money to come from—cash reserves, borrowed funds, or the partners. The fact is law firms don’t have unrequired cash reserves. Remove funds intended for partner distributions, and law firms usually have cash reserves of less than two weeks running time. That leaves borrowed funds, which, if available, have to be guaranteed by the partners, or the partners' pocketbooks.

Retirement: Retirements over the next 10 years are going to put new or at least heavier strains on cash than previously experienced. Unprepared firms may find the load too burdensome to continue. In discussing unfunded retirement programs, Cotterman puts it this way: “The benefits paid in an unfunded retirement program are a tax on current income. That tax must be accepted as fair and bearable; otherwise, the current partners shall declare the tax null and void. Unsecured promises to pay benefits will not survive the demise of the firm. Such demise can happen by design—partners vote to dissolve, or by default—key partners depart with their clients, leaving a weakened unsustainable firm behind. Generally a tax less than 5 percent of owner compensation is okay; under 3 percent even better. Over 7 percent is dangerous and over 10 percent probably unsustainable.” Even if the law firm is free of unfunded obligations, capital accounts of retiring partners will become due and, unless funded by new partner contributions, must come out of the law firm's general funds, reducing cash for operations and distribution to remaining partners.

Unknown: Partners often fail to clearly realize that capital protects their future income stream. If the firm goes under, that income stream is interrupted. Granted that as a legal professional, the former partner of a failed firm can go elsewhere and practice law, but personal wealth and income is going to take a nose dive for some time. Law firms with only “two weeks running time” are operating on a razor’s edge. Most investors would find such a risk unacceptable. Leaving something on the table every year is a prudent investment to protect the income and wealth of law firm partners.

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.

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Labor Day marks the end of summer, and with its passing managing partners begin thinking about end of year issues.

It is time to turn up the heat on billing attorneys. Ideally, the firm remained focused on billing and collection efficiency throughout the year. Unfortunately, I know from experience that law firms (especially non-AmLaw 200 firms) tend to let work-in-process and accounts receivable accumulate during the year. As year end nears and partner distributions become threatened, unbilled worked that has been wasting away in the firm’s inventory finally get billed. Likewise, partners start chasing delinquent bills with determined effort.

Don’t wait any longer. Take steps now that will encourage partners to clean up old work-in-process and collect past due bills. Circulate a weekly aging report by billing attorney of both unbilled items and uncollected billed items. The comparison by billing attorney puts peer pressure on your side. At month end, you will also want to compare the current amounts to the amounts as of the end of the prior year. The difference will help bring home to partners the extent of billing and collection work that needs to be done. It is also helpful to hammer home that the increase in WIP and AR over prior year-end amounts is money that will not be available for partner distributions unless billing attorneys get busy and reduce funds they have let sit idle—unbilled and/or uncollected.

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.

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I spent a good bit of time in the Juris exhibit booth during last week’s ALA conference in Las Vegas. Just about every fourth attendee was an administrator from a law firm using Juris software. One of those attendees had read some of my posts dealing with realization and the benefits of faster billing and better collection efforts. They wanted to see something that could help them in their effort to encourage improved billing attorney performance in these areas. The Juris team member they were talking with used the company’s new Active Information application to create the report shown below.

The report not only gives the viewer a quick snapshot of unbilled and billed-but-uncollected fees, but it shows the average days that each billing attorney is taking to bill and then collect from their clients.

Now here is the important part: all the viewer has to do is highlight and click on a field in the report to see the details. Click on WIP over 90 days and view the clients, then matters, and then the transactions that represent those unbilled items. Likewise, click on A/R and view the bills that comprise the billed-but-uncollected balance.

It is one thing to get a snapshot report like the one above. But converting that into actionable information is a different story. A report can show you a problem, but you can’t do anything about it unless you can get at details to identify the reason for the problem. That is what makes Active Information so valuable. The information is actionable. You can spot a problem and then drill down to its source so you can do something about it.

Why should firm leaders have to waste billable time digging through traditional reports that just tell them what has already happened when they can start getting targeted actionable information in time to change the outcome? If you are not a Juris law firm, talk to your software vendor to find out if they have anything with similar capabilities. If not, you might check into Handshake Software. Handshake, a Juris Alliance Partner, has similar capabilities and works with both Juris and non-Juris software.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income contact Juris National Sales Center at 877/377-3740, e-mail info@juris.com or go to www.Juris.com.

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