Chapter 8 Billing and Financial Management

Billing Should Be Regular and Frequent Monthly billing is the most common method of billing. Clients prefer smaller monthly bills. A client’s perception of the value of legal services diminishes with time.

Bill Must Be Effective Descriptive bills Bills that are correct Errors in math Typographical errors Client perceives the value to the service “Nickle and Dime” charges

The Billing Process Timesheets prepared by attorney/paralegal Data entry into time and billing progam Pre-bill generated for review and edit Final bills generated Management Reports generated Aged accounts receivable Productivity reports Other reports

Statutory Requirements for Legal Bills B&P Code section 6148 All bills must clearly state: Amount of the bill The rate charged The basis for the calculation of charges and costs Must be furnished to client 10 days following request or every 30 days

“Block Billing” Where multiple tasks are billed as a single entry of time and charges Example: “Research, draft motion for continuance, conf. with attorney Jones re: hearing date and attend hearing on motion for continuance – 25hours - $6,250.

Elements of a Legal Bill Name of the case Billing period Date of the work Description of the work Time increment Name of person performing the work Hourly rate Cost of the work Itemization of costs Total costs Total fees and costs Payment terms

Common Unethical Billing Practices “Padding” Applying a client’s funds to a disputed fee Trust account transfers Charging more than a client agreed to pay Charging for services not rendered to a client

Common Billing Problems Vague descriptions Perceived poor work (review and revise) Nickel-and-dime billing Team churning Interoffice conferences Errors in arithmetic Sent to wrong person or address Padding Clerical work Block billing Billing for costs not agreed to Delegable tasks – task performed by appropriate person

Computerized Billing and Time Accounting Most firms use some variation of computerized time and billing software Traditionally these were in-house software systems Maintained by the firm SaaS (Software as a Service) Hosted by the vendor Available over the internet Vendor provides maintenance and support Vendor charges monthly fee

E-Billing E-billing – a process that allows invoices to be presented to the client over the internet. Typical e-billing flow chart:

Law Firm Financial Management

Profitability Factors Direct R ates U tilization L everage E xpenses S peed Indirect S trategy C ulture O rganization R eward systems E Environment

Two Types of Expenses Compensation Operating Associates and paralegals Administrative staff Employee benefits Operating Occupancy costs Financing costs Office operating costs

Common Expense Catagories Advertising Bank Charges Books and Publications Costs Advanced Depreciation (non-cash) Employee benefits Equipment Rental File Storage Insurance Liability Malpractice Workers Compensation Interest Travel/Meals Office Supplies Professional Dues Rent Salaries Taxes Employment Property Telephone Temp. Services Utilities

Accounting Systems = Accounting system tracks Income Expenses Accounts receivable Accounts payable Provides additional management reports Profit and loss statements Balance sheets Cash flow reports =

Profit & Loss Statement Income: Income – legal fees $1,350,247 Total Income $1,350,247 Expenses: Depreciation* 25,250 Salaries 550,000 Rent 400,000 Taxes 35,000 Advertising 20,000 Interest 15,000 Office Supplies 27,000 Total Expenses $1,072,250 Net Income $ 277,997

Balance Sheet , Assets Current Assets: Cash in bank $75,000 Client Trust account 10,000 Fixed Assets: Office equipment $100,000 less: Depreciation (20,000) Vehicles 60,000 less: Depreciation (5,000) Total Assets $220,000 (Cont.)

Balance Sheet (cont.) Liabilities and Owner’s Equity Current Liabilities: Bank Line of Credit $50,000 Accounts payable 7,500 Other Liabilities: Client trust liability $10,000 Total Liabilities $67,500 Owner’s Equity $152,500 Liabilites and Owners Equity $220,000

Balance Sheet Formula Assets = Liabilities + Owner’s Equity

Cash Flow Statement A report that details the cash received and cash expended by the business for each month. Composed of: Beginning cash on hand Cash receipts during month Cash paid out during month Ending cash on hand

Accounting Methods Cash Accounting: Receipts are recorded on books upon receipt Expenses are recorded on books when paid Billings or WIP are not reflected on books Most small firms use cash method accounting Accrual Accounting: Records income when earned Records expenses when incurred

Types of Accounting Systems Stand alone systems Quick Books Peachtree Sage Integrated systems Systems that include billing and accounting in a single system

Budgeting Process Project total overhead for the year Personnel costs/compensation Operating expense Project number of billing attorneys/paralegals and target rate for each Estimate number of billable hours per year Calculate realization rate - % collectable Project gross billings or gross income Adjust the rate, billable hours or overhead to balance budget

Law Firm Financial Ratios Annual billable time Attorneys (partner) income as a percentage of billings 60-65% of realized billings Associates salary as a percentage of billings Salary should be 1/3 of billings Not realized billings Realization Rate Percent of bills collected Target is 95% - most firms 80-90% Aged Accounts Receivable Collection rate is 67% of accounts over 120 days old

Law Firm Banking Bank Accounts Credit Facilities General Operating Account Client Trust Account Payroll Account Costs Advanced Account Credit Facilities Lines of Credit Equipment Loans