Many solo and small firm lawyers don’t spend much time reviewing financial data from their practices. They are busy and just feel lucky to get through the day without too many important client tasks having to be carried over to tomorrow’s To Do list. There are a couple of financial calculations, though, that are easy to do and can really help a solo or small firm to tighten up what is often a wide-open faucet leaking money.
Billing realization is the percentage of recorded attorney or paralegal time that actually ends up on the bill sent to the client. For example, if $1,000 worth of time is recorded on the time sheet, but is later whittled down and billed out for $900, the billing realization rate is 90% ($900 divided by $1000), meaning that the firm has billed out only ninety cents of each dollar of time recorded as having been worked.
Collection realization is the percentage of your billed fee which is actually collected. For example, if you bill a client $900 but you are only able to collect $800 within a reasonable amount of time after the bill is sent (no more than 90 days), then your collection realization rate is 89% ($800 divided by $900).
It is important for the firm to monitor not just the aggregate dollars written off as billing adjustments and uncollectable fees, but to also monitor the realization percentages.
Billing realization percentages that fall below 90% on a regular and sustained basis are an indication that a lawyer or practice is not working effectively and efficiently on behalf of his or her clients. The lawyer may need additional training in the area of the law, new procedures for streamlining the work process and eliminating unnecessary steps, or both.
Collection realization percentages that fall much below 90% are an indication of poor case selection and client screening, and will usually indicate that a practice may need to give some additional thought to the types of cases it handles and the minimum criteria those cases must meet before they are accepted.
Performing these simple calculations and then acting on the results can yield tremendous additional profit for a firm, without individual members having to work harder, simply by tightening up billing practices.
Most attorneys will, naturally, be put off by the thought of having to answer to anyone else, such as a billing committee member, about the final content of a client’s bill. But accountability within a firm is a very good thing when it comes to discounts given beyond a modest limit everyone agrees to in advance. And if you are a solo, realization reports can help you hold yourself accountable.
Are your profits draining away? It’s easier than you might think to find and plug the leaks.