Law Practice Funding
Law practice funding is vitally important to the success of your firm. Yet, a great many attorneys and legal firms really miss the mark with keeping their accounts accurate in this regard.
They must do better with really understanding how much money they are truly making per hour. A legal practice is a business, and like all businesses it needs to look out for the bottom line, or it will be forced to cut people loose or, perhaps, fold.
Law practice financing must be done in a way that is mindful of the RULES. These RULES were put together in the 1990s by the late, great Robert J. Arndt. They comprise the following:
- Realization of billing rates
- Utilization of attorneys
- Leverage of lawyers
- Expense control
- Speed of billings and collection
By following the RULES, law practice funding can attain a higher level of "Realization", which is defined in the industry as “how much is ultimately collected” compared and contrasted with “effort expended.” An attorney or legal firm needs to Realize as much as possible without becoming unfair to clients. This is sound business practice in any industry. Realization is the first part of the RULES, as we see.
To analyze Realization, begin with your established standard hourly rate. Figure out a reasonable expectation of how much money an attorney should be bringing in based on hours worked. Then, go back over the records and see how this compares to actual practice.
Let's imagine your standard rate is $120 per hour. But, one of your attorneys wants to be more price-competitive, so agrees with a certain client to work for $100 per hour to ensure that he gets the business.
Then, he becomes compassionate about the plight of his client, so he ends up knocking off another $10 per hour. He does 12 hours of work for his client, so he ends up billing him $1,080. But the client disputes one hour of work, so refuses to pay more than $990 which the firm collects. Yet, this should probably have been $1,440 the firm collected ($120 x 12 hours).
For Utilization, the idea for the law practice financing effort is to get attorneys maximizing the efficiency of their billable hours. The firm must set up published billable-hour objectives against which staff attorneys need to measure their performance so that the firm can see how efficiently it is working. There are many factors involved here, including current economic conditions and the time-lag in collections, so make your objectives realistic but not compromised.
Leverage of Lawyers is defined by Arndt as the "ratio of associates or non-equity partners to equity partners in the firm." This part of law practice funding is simple in principle: a highly leveraged law practice has only a few partners and a relative many hourly-billing non-partner staff attorneys. If Realization dips, the hourly attorneys need to give over a greater percentage of their net income to the partners for the partners to maintain their expected a nd anticipated incomes. If they know this, they will work to make more money (increase their Utilization).
Expense Control is defined by Arndt as "planning process or budget that supports a firm’s [objectives]". This one is self-explanatory, yet it is amazing how many firms aren't very mindful of this part of the RULES. Expenses aren't always as controllable as the other parts of the RULES, and in the long run they are admittedly not as important, but nevertheless they should be documented assiduously so that a realistic business picture and sound law practice funding are maintained.
Speed has to do with the space in between billable hours practiced and actual collection. Your law practice funding has to include a goal, here, of getting all attorneys to bill their clients as frequently as possible. The standard monthly billing practice throws a lot of money out the window in the form of giving clients zero-interest loans. Lag time between billable hours worked and getting paid can, clearly, lead to certain "complications" that no soundly run business needs.
So, remember, sound law practice financing has to follow the RULES. If it doesn't, it's throwing away money--and no business can really afford to do that.
Find more law practice financing info here
Get more law practice funding and management resources
SEE Our Home page or Contact Us
