Hong Kong Lawyer

JANUARY 2018

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M anaging a smaller law firm can be a very time consuming business given that the partners usually have heavy fee earning roles as well as attending to business development and client relationship management. As a consequence, profitability management tends to be done after the event, often by simply focusing on the cash that has come in and gone out: an increase in cash is taken to mean all is well while a decrease signals the opposite. The problem is that in most cases there is a time delay between the profit being earned and the cash it generates being received. Hence any deterioration in profit is likely to be well underway by the time the cash flow suggests that there is a problem. In addition it is important to maintain a focus on business development to ensure that there is a strong and consistent flow of instructions into the firm. Without that flow, revenue and profits will fluctuate quite significantly and this makes profit management even more difficult. In what follows we suggest five relatively simple techniques that will allow partners to better manage profitability and, in so doing, be more profitable. Technique 1: Manage profits separately from cash Generating profit is a separate function from collecting the cash due from invoices rendered to clients. A declining cash balance certainly indicates a problem but it might not be a profitability issue. It might be that partners have not invoiced for work that has been done profitably or it might be that invoices have been issued and clients are very slow paying. On the other hand, the firm has to pay much its expenses each month so the firm is in effect funding its clients for as long as it takes for clients to pay. The first step is to ensure invoices are sent out as soon as possible. Seek to negotiate interim invoicing for longer term projects and try to agree monthly invoicing with clients. Set a target for the outstanding amount of unbilled work (work in progress) and unpaid invoices (debtors or AR.) Without a target there is no pressure on partners to get invoices out to clients promptly and to chase up slow payers. An easy target is to make it a percentage of budget annual revenue – say 25% (equivalent to three months revenue). So if revenue is HKD10.0m then 25% would be HKD2.5m or 3 months of revenue. (Annual revenues of HKD10.0m average HKD833k per month or HKD2.5m for 3 months). If it is felt that 25% is too low, given the nature of the firm's business, then increase it but it should not go above 40% of annual revenue (4.8 months). Focus on keeping the work in progress and debtors within the target. Few firms in the world today, both large and small, allow their work in progress and debtors to exceed 50% of revenue. Technique 2: Record time daily Several studies we have conducted show that a failure to record time on client work daily leads to an erosion of billable time that increases the longer it takes to record the time. In fact doing it weekly rather than daily leads on average to around 15% of billable time unrecorded, in other words, time lost from the firm's records. For hourly rate priced work this means that the price charged will be less than the actual time spent. On fixed price work it will look as if a matter was profitable when it might not have been. With today's electronic phones and other portable technology, there is no excuse for partners (and others) to not record their time daily. Poor time recording not only means that some time is lost but it also results in a distortion of the metrics PRACTICE MANAGEMENT 執業管理 Five Techniques for Improving Profitability in Smaller Law Firms By Alan Hodgart Hodgart Associates Ltd. 68 www.hk-lawyer.org •  January 2018

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