The word “control” resonates with every attorney I have ever met. “Keeping score” is my synonym for control. I will venture to say I want you to have some fun keeping score!
Before you say, “I am not a numbers person,” think about the numbers. “Keeping score” means knowing and controlling the money generated and used by your law practice. You want to know where the money comes from and where the money goes. But no green eyeshades are necessary!
Predicting the Future
A budget is the “predicting” portion of keeping score. A budget is the plan for the acquisition and use of money for a specific period of time. The budget is the basis for the scorecard that enables you to know the success of your predictions for the year.
Here are several methods for preparing a budget:
Simple Method #1: Look over last year’s tax return and use the fees and expenses that you reported last year as this year’s budgeted amounts. While simplistic, this method gets you going with numbers that reflect a measure of reality.
Less Simple Method #2: Determine how much money your law practice must generate to support you personally as well as to pay practice expenses (overhead). This is called “break even.”
Lawyer’s Personal Income Needs $ 75,000
Expenses of the Law Office $ 35,000
Fees Necessary to Collect to Break Even $110,000
Least Simple Method #3: Examine each account and think about how volatile those accounts will be in the coming year. Note your assumptions about why an account may change significantly.
|SOLO PRACTICE WITH NO STAFF||VOLATILITY ASSUMPTIONS||2015 BUDGET|
|Fees Collected||Settlements may fall short of 2014||$110,000|
|Rent||Same as 2014||$13,000|
|Malpractice Insurance||Slight increase||$2,500|
|B & O Taxes||Pro rata||$1,000|
|NET TO LAWYER||$75,000|
The difference between a budgeted number and an actual number is called a “variance.” The most meaningful variance analysis is the comparison on a year-to-date basis for both the budget and last year. The variances are your “scores!” The prize is a greater positive variance between fees collected and total costs than was budgeted.
Let me Count the Ways
The “top line” or fees collected is the number that requires the most attention during the year. There are four factors to include in the analysis that results in a report called the Pipeline Report.
Fees Worked—the hours charged to a matter times the hourly rate(s)
Fees Billed—the amounts billed to the clients
Fees Collected—the amounts collected from the clients
Realization—the percentage derived from fees collected divided by either fees worked or fees billed
|December 31, 20XX|
|Year-to-Date Last Year||Year-to-Date This Year|
Software applications such as Credenza, RTGSoftware, and TABS3 are able to provide these numbers. QuickBooks is the accounting software used most widely in solo and small firms. Any bookkeeper knows QuickBooks. Its strength is for tracking expenses and for trust accounting. The other products listed are better for billing. Be sure to take a look at the product comparisons prepared by the ABA Legal Technology Resource Center.
Even with a contingent fee practice, keep a record of your hours on each matter. As the work progresses, monitor your hours worked relative to your estimate of the expected fee.
Have some fun with the variances as you watch the actual expenses track against the predictions for those expenses. It is even more fun to watch your collected fees start to exceed your predicted break even collected fees.