law firm

Most law firm partners got into practicing law because it’s something they were very passionate about, very good at or both. However, many partners have received very little, if any, training when it comes to the business side of running their firm.

Basic business management skills are critical to law firm success. If the firm isn’t properly managed by the partners, it’s only a matter of time before it encounters financial problems.

Learning Basic Business Management Skills

If you are a law firm partner or solo practicing attorney, you owe it to yourself to be proactive when it comes to learning the basic business management skills necessary for law firm success. Start by determining some key law firm metrics, such as average monthly revenue, monthly cash flow, fixed and variable expenses, attorney productivity, and overall firm profitability.

Based on average monthly revenue, project the firm’s total revenue for the year, keeping in mind seasonality factors if they apply to your firm. Then break down profitability by each individual attorney and client so you can see which attorneys are working most productively and profitably and which clients are earning your firm the most money. These are the types of clients you should focus on attracting in your marketing and referral efforts.

Next, look for ways to increase the profitability of your least-profitable clients, whether this means increasing their billing rate or providing them with fewer and/or less-costly services. Of course, this might not be feasible — if not, at least try to avoid clients like them in the future. Meanwhile, try to add more value to your relationships with your most profitable clients and to provide them with the best and most responsive service that you can.

As you perform this profitability analysis, determine which areas of legal specialty are your firm’s most profitable, and which earn the least money for your firm. This will tell you where you should concentrate the firm’s new business development efforts going forward.

Focus on Cash Flow

Cash flow is another critical area of law firm management that cannot be neglected. For many firms, high overhead — expensive office space, travel and entertainment and high attorney salaries, for example — is part of the cost of doing business, especially those that operate in big, expensive cities. Strong cash flow is essential each month to meet these and other expenses.

Historically, the average law firm cash flow gap has been about 105 days. In other words, this is how long it takes for the average firm to collect receivables from its clients after it has covered its monthly expenses. One way to shrink this gap and boost your firm’s cash flow is to require that clients make a down payment on their total projected fee. Another is to make it easy for your clients to pay you by giving them multiple payment options, including credit cards. While you’ll pay a small merchant processing fee, this may be more than offset by the cash flow benefits you’ll realize.

But the most effective way to improve cash flow for most firms is to improve billing and collection procedures. This starts with prompt invoicing: Instead of billing clients upon completion of their case, invoice them periodically for work in progress (or WIP) — especially if the case will proceed for many weeks or months. And make your invoices easy to pay so clients can’t say they didn’t understand the terms or how much they owed.

But the most effective way to improve cash flow for most firms is to improve billing and collection procedures. This starts with prompt invoicing: Instead of billing clients upon completion of their case, invoice them periodically for work in progress (or WIP) — especially if the case will proceed for many weeks or months. And make your invoices easy to pay so clients can’t say they didn’t understand the terms or how much they owed.

On the collections side, diligence in pursuing past-due invoices in critical. The longer invoices go unpaid, the less chance you have of eventually collecting your fees in full. Clearly stipulate your payment terms on the invoice (e.g., net-30 days) and the amount of interest that will be charged on late payments. Someone from your accounting department should either telephone or email past-due clients on the first day their payment is late to inquire.

Ensure Adequate Internal Controls

It’s also important to make sure that you have built adequate internal controls into your firm’s financial operations. Employee theft and embezzlement are more common than many law firm partners would like to admit, and the best way to protect your firm is to make it difficult for your employees to steal from you.

Internal controls start with a concept known as segregation of duties. This simply means that more than one employee in your accounting department is responsible for performing financial tasks like depositing checks and managing the books. Also look into bank fraud prevention tools like Positive Pay — this service can significantly curtail check fraud by allowing you to make pay or no-pay decisions on checks presented for payment that are suspicious.

Assess Your Marketing Effectiveness

Finally, keep in mind that marketing is an integral part of running a successful law firm today. Most law firms today have a presence in at least one or two mediums, whether this is print advertising, billboards, television, radio or targeted Internet banner ads. Create metrics that are designed to measure the effectiveness of your marketing campaigns so you’ll know what’s working for you — and just as important, what isn’t.

Having the right banking relationship is a key component to your firm's success. At City National, the associates in our Legal Services Group have spent years learning the infrastructure needed to fully support the financial requirements of law firms.

To learn more about how our Legal Services Group can help your legal firm and its partners and associates with automated processes, treasury management, bank account solutions and more, please call (213) 673-9500 and ask to speak to one of our Legal Services experts.

City National, as a matter of policy, does not give tax, accounting, regulatory or legal advice. The effectiveness of the strategies presented in this document will depend on the unique characteristics of your situation and on a number of complex factors. Rules in the areas of law, tax and accounting are subject to change and open to varying interpretations. The strategies presented in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. The strategies were not written to support the promotion or marketing to another person any transaction or matter addressed. Before implementation, you should consult with your other advisors on the tax, accounting and legal implications of the proposed strategies based on your particular circumstances.