BarTalk February 2003
Volume 15, Number 1

Financial management tips

by David J Bilinsky

Life’s going by me
And still I say,
Oh God!
I’m making the same mistakes...

Lyrics by Sully Erna
Music by Sully Erna and Tony Rombola
Recorded by Godsmack

Voltaire once said: “[H]istory is nothing more than a tableau of crimes and misfortunes.” While lawyers are quite comfortable dealing with crime, they are less comfortable dealing with the financial aspects of running their own practice. To remedy these misfortunes (or missed-fortunes) let us look at the lessons pulled from history and disprove George Bernard Shaw when he said: “Hegel was right when he said that we learn from history that man can never learn anything from history.”

Develop a cash flow and financial plan: We have seen many lawyers start out with an office lease, a line of credit and the best of intentions. They are under the assumption that the road to success is paved by simply working harder. But, working harder may not be the solution if you haven’t kept your eye on the fundamentals. As in many things, timing is everything – rent, salaries and other bills all have to be paid on time or you not only risk losing credit facilities, you risk losing your business. When you combine overdue bills with clients who refuse to pay or delay in making payments on your accounts, you can be caught in a financial squeeze.

You need to sit down and do the math: for a 12-month period, prepare a month-by-month detailed budget. Build in all expenses that you know will occur or you can anticipate and when they must be paid. Calculate in unexpected expenses, since it is a Murphy’s Law that costs will always be greater than you think. Build in marketing time and expenses. Most of all, build in your draw, for if you don’t look after yourself, no one else will. Then look at the bottom line and see how much cash you must bring in each and every month to meet your budget. Financial security and happiness are rarely an accident.

Acquire legal accounting software that has a financial modeling and reporting component: It is a given that in order to make good decisions, you need good data. However, I have heard from many lawyers that all they want from an accounting package is just the basics. This overlooks the fact that as lawyers and business owners, we need software that will give us insight and knowledge into how we are doing in the business department. So, look for packages that build in as many management and modeling reports as possible. For example, Quickbooks Pro will: “Automatically create a budget, Track time by job, and Track job costs to see where you’re making or losing money.”

While moving to a different accounting package may be a troublesome undertaking, remaining with a financial package that doesn’t help you run your business will be more expensive and troublesome in the long run.

Deal with under-performing partners and associates: In a small firm, failing to face up to the fact that Joe isn’t having a good year (or years) can have dire consequences. The signs are usually there for anyone to see: failing to bill on files, putting in many hours on files that had no chance of making any kind of a financial return to the firm, driving up the line of credit, continuing to take draws disproportionate to their income, ballooning accounts receivable and associated large write-downs, hostility expressed toward anyone who questioned his/her ‘right’ to a draw due to his/her status in the firm, and on and on.

Have monthly meetings scheduled for the purpose of examining everyone’s performance against stated financial goals: billable hour targets (WIP), expected file revenues against accumulated WIP, WIP billed (bills rendered), bills collected, accounts receivable balances (net increase or decrease), accounts written-off or deemed uncollectable, disbursements incurred, disbursements billed, disbursements written-off, status on files outstanding. It has long been stated that what gets measured gets done. If everyone in the firm is required to undergo a monthly examination, then you have instilled a culture in the firm that is self-correcting – and if someone does get out of line, you have a decision to make and a forum within which it can be made.

Have a written office sharing or partnership agreement: One of the purposes of having a written agreement between all parties is that everyone knows the terms of the arrangement between them – the expectations, the consequences and the means to implement those consequences. Not having such an agreement between lawyers is the equivalent of a shoemaker’s children running around barefoot.

Every partnership agreement should incorporate the requirement for adequate life and disability insurance to ensure that a partner who died or became disabled could be compensated for his/her share in the partnership and that the firm could pick up the pieces and carry on the business. Inadequate insurance can leave the deceased partner’s family and remaining partners financially stuck or worse, in litigation.

Reduce your firm debt: Under-capitalization is endemic in small business, and law firms fall into this group. In fact, due to the constant need for and emphasis on taking out draws and bonuses, lawyers do not tend to be big investors in their firms. This translates to firms being reluctant to leave capital in the firm for such investments as technology – even if that technology would produce long-term gains – due to the impact on short-term cash flows.

Alternatively, if capital investment is required, firms tend to go into debt rather than encourage partners to invest in the firm. Carrying large amounts of debt reduces the resiliency of the firm to downturns in the financial environment. Furthermore, carrying large amounts of debt combined with a lack of a partnership agreement promotes positive performing partners fleeing a firm if they sense a downturn – in effect, exacerbating an already bad situation.

Keep involved with the administration of your office: A good law office administrator or office manager is worth his/her weight in gold. However, lawyers, due to time and billing pressures, can be only too willing to delegate financial decisions to bookkeepers and others in the office – who may or may not have the training and abilities to run a business. Furthermore, it is rare to find a staff member, no matter how well-intentioned or capable, who has the same interest in driving down costs and looking for more efficient ways of doing things as does an owner.

What to do? If you do delegate, do so in graduated steps and build in feedback loops that allow you to evaluate the effectiveness and efficiencies of the decisions made by the particular staff member. Periodically, pick at random a trade account with a supplier and review it to see if you have been well served. Are their costs competitive? Are you getting volume breaks and discounts? Can you strike a better deal by moving your business elsewhere? What extra services can you get them to render for the same cost? Can you consolidate your business to a few large vendors and drive a better deal for you and your clients?

So there are the first six tips for improving your financial future. In Part 2 we will explore these issues further, but now it is up to you – after all, it was Sir Winston Churchill who said: “History will be kind to me for I intend to write it.”

David J Bilinsky is the Practice Management Advisor at the Law Society of British Columbia. He can be reached on the Internet at dbilinsky@lsbc.org. The views expressed herein are strictly those of the author and may not be shared by the Law Society of British Columbia.

This article originally appeared in the February 2003 issue of BarTalk and is reproduced here with permission of both the author and the Canadian Bar Association, British Columbia Branch.