Even attorneys who aren’t good at math can track, monitor and gain control of their finances based on the trends revealed by the financial dashboard.
By Mark Powers & Shawn McNalis, Practice Advisors
“If I was good at math I would have become a doctor,” joked one of the attorneys we began working with recently, in response to a question regarding how he managed his firm’s finances. We laughed but suspected he was wildly disorganized in this particular area. Like so many of the attorneys we work with he was a highly skilled legal practitioner, but his practice management skills were weak. In his case, he had flirted with financial disaster often enough to finally seek help.
Fortunately, he had a part-time bookkeeper on board who wanted to assist. Unfortunately, she was making the situation worse by flooding him with too much information. On a monthly basis, she’d deliver a stack of reports to his office. Overwhelmed by all of the detail, he’d glance at the pile and tell himself he’d look through it all when he had the time. But in fact, only when a financial crisis loomed would he give his bookkeeper the opportunity to discuss corrective actions. He managed his firm finances in a highly reactive manner, never able to properly predict cash flow. Operating this way left him feeling out of control and he was motivated to change.
Gain Control of Your Firm’s Finances with a Financial Dashboard
We recommended he take a systematic and proactive approach to managing the firm’s finances so he could have the information he needed, but in a more digestible form. We instructed his bookkeeper to keep running his monthly reports, but then to summarize the key financial data and put it into what we call a financial “Dashboard.”
Our financial Dashboard displays the firm’s key financial information similar to the way the gauges in the console of a car display speed, battery charge, and fuel.
Trying to drive a car without the basic information provided by the dashboard would be a much more haphazard activity. The driver would have no idea how fast they were going and whether or not they had enough fuel to get there. Anticipating this problem, the inventors of the automobile wisely created a dashboard in which vital information was displayed prominently, allowing drivers to make intelligent decisions en route. Thanks to their foresight, there’s no need to get out of a car to check the amount of fuel in the tank – a simple glance at the dashboard lets drivers know how much gas they have.
By prominently displaying your key financial indicators, the financial Dashboard serves the same purpose and allows you to either keep moving forward at your current course and speed, or stop to make important adjustments.
The Advantage of Using a Dashboard
This form, located at the bottom of this article, is basically a bottom-line summary of several different reports which provide a snapshot of a firm’s financial status. It gathers the most essential data from your profit and loss statement, your hourly billing report, your expense report, your account receivables report and your financial operations report. Added to this are your monthly marketing statistics as it’s important to see the trends developing in this area as well. Marketing activities drive business in the door, which serves as fuel to the firm. If the number of activities starts to decrease in the marketing categories, it will negatively impact the firm’s finances down the road. Here’s a breakdown of each of the sections of the Dashboard which explains which numbers are captured and why:
a) The Revenue Section: Divided into two areas, the left side shows the fees and costs that were billed for the month, along with any interest billed. On the right side are listed the fees, costs and interest payments that were collected for the month.
b) The Monthly Billing Section (for hourly billing practices): This section lists the total hours billed for the month by each timekeeper. A firm’s timekeepers are like the engine in a car working to generate power – or in this case, revenue. When you see these numbers dropping it means your timekeepers are not meeting their monthly goals and this does not bode well for future cash flow.
c) The Expenses Section provides the attorney with an overview of the Fixed, Variable and Client Reimbursed expenses, followed by the Payroll total and the Payroll taxes. All of this is totaled at the bottom allowing the attorney to view the sum of the firm’s expenditures on a monthly basis.
d) The Accounts Receivables Section The top section allows the professional to see what was billed for the month against what was collected and what was collected in the 30, 60 and 90 days outstanding categories. Many firms have enormous difficulty collecting what is owed them and their effective hourly rate is reduced significantly due to this problem. We recommend a “realization rate” of 95%, meaning that the firm collects 95% of what is owed them. Seeing these numbers starkly displayed on a monthly basis keeps their focus on collections.
e) The Marketing Stats Section This area is dedicated to a quick summary of client development activities that occurred during the month, a list of new referrals that were sent and a list of the types of cases being referred. As mentioned before, if the firm does not engage in marketing activities on a regular basis, future cash flow is at risk. A drop in marketing activities is an early warning sign.
f) The New Business Section This area captures the number of new client inquiry calls, the number of calls that are scheduled for an initial consultation, the number of engagement letters which are given to prospective clients, the number of matters closed and how many matters are currently open. It shows the conversion of client inquiries to initial consultations, and how many clients are converted from the initial meetings. If there are high numbers of people calling and qualified potential clients having initial consultations, but few people are converting to become actual clients, something is wrong with the consultation conversation.
g) The Financial Operations Section This last section is dedicated to showing what is in the operating account and what is in the trust account.
Most attorneys are not trained to evaluate cash flow and do not have an adequate system to display the trends in their finances. This easy-to-read summary allows them to view the most important information all in one spot. It covers all of the most important areas that provide “fuel” for the firm.
We recommend that attorneys review this form once a month if they are in a relatively stable financial situation and cash flow is good. If they are in a financial crisis and have a large collections problem, they might review this form once a week.
Their bookkeeper or office manager should manually fill in the information on this sheet for the attorney to read and then they should go over it with the attorney in a regularly scheduled meeting. Detailed reports from the firm’s bookkeeping software should be used to gather the information and be included behind the summary sheet. The attorney can go through the attachments to find answers — if they require more information. If they do not require more detail, they can read the Dashboard, compare it to previous ones and quickly see what financial trends may be unfolding.
By using this form on a monthly basis, even attorneys who aren’t good at math can track, monitor and hopefully gain control of their finances based on the trends revealed by the Dashboard. Most attorneys are driving blind — using a Dashboard like this puts the attorney back in control.
Mark Powers, President of Atticus, Inc. and Shawn McNalis, co-authored How Good Attorneys Become Great Rainmakers, Time Management for Attorneys, Hire Slow Fire Fast and are featured writers for Lawyers Weekly and a number of other publications. www.atticusonline.com
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