Law Firm Financial Management Practical Tips & Suggestions – Part I

By John W. Olmstead, MBA, Ph.D., CMC

Managing the firm’s finances is one of the most important management roles in a law firm. Effective financial management is a critical success factor and determines whether a law firm is financially successful. General partners, managing partners, firm administrators, and firm accounting managers or bookkeepers must do all they can to stay abreast of law firm financial management best practices that are being used in the legal industry.

This is part one of a multi-part series of practice tips and suggestions that will be published from time to time.

Structuring Your Financial Management/Accounting Team

How a law firm structures its financial management/accounting team is one of the key variables to insuring that the firm manages it finances properly. The size and skill of a law firm’s financial team usually varies directly with the size of the firm. Larger firms with a larger volume and more complex transactions require more sophisticated systems, procedures, and controls, and personnel with the knowledge and experience to operate effectively and efficiently in a more complex environment.

As a firm grows beyond a handful of attorneys the firm discovers that it needs more than just a bookkeeper. The firm now needs more sophisticated analytical skills as the firm grows and becomes more complex. The title for a law firm’s Chief Financial Officer will usually vary with the skill required for the position. Typical titles include:

In small firms where financial activities are typically uncomplicated and volume is relatively modest, an accounting manager ordinarily oversees the finance function. The accounting manager is often a bookkeeper/billing collections clerk who handles the accounting, payroll, billing, and collections. Larger firms often hire an experienced firm administrator to handle the accounting manager functions as well as managing other aspects of the firm such as human resources, IT, facilities, marketing, etc. Medium size firms have a controller with accounting assistants reporting to them. Larger firms have directors of finance with managers reporting to them. Roles and positions descriptions should be developed for each and every finance/accounting position and staff with well qualified employees.

Law Firm Key Financial Goals/Metrics

 There is an old saying – What Gets Measured is What Gets Done. If you cannot measure it, you cannot manage it. Law firms should have well defined goals, financial and non-financial expressed in business plans, strategic plans, marketing plans, and budgets.

  1. Goals are critical to success of any law firm. Here are ten requirements for quality goals:
    Your most important goals must be yours;
  2. Goals must be meaningful;
  3. Goals must be specific and measurable;
  4. Goals must be flexible;
  5. Goals must be challenging and exciting;
  6. Goals must be in alignment with values;
  7. Goals must be well balanced;
  8. Goals must be realistic;
  9. Goals must include contribution; and
  10. Goals need to be supported.

Once goals are established performance should be measured and compared against goals.

Here are a few performance metrics that are appropriate for law firms:

Once firm goals, financial and non-financial are formulated, either run reports that are available from your system or develop special Excel reports that measure goal accomplishment.

Compare performance against goals, investigate variances and performance gaps, determine reasons for any performance gaps, and taken corrective action when required.

Law Firm Retainer Management – Replenishment 

While many law firms, especially family law and estate administration firms, do a good job of collecting the initial retainer they fail to replenish the retainer, the clients get in the hole, accounts receivable balances increase, and the firm ends up writing off uncollectable receivables. Here are a few suggestions:

Law Firm Collections/Retainer Management – Using a Retainer Follow-up Report

The best way of managing a law firm’s accounts receivable is to have less in outstanding accounts receivable in the first place. This is accomplished by staying on top of retainer balances compared to work in process and asking the client for additional retainer before the work in process exceeds the retainer balance. In order to stay on top of retainer replenishment law firms need to develop what I call a retainer replenishment report and have someone assigned to reviewing the report daily and advising responsible attorneys to contact the client when work in process has hit a certain threshold (percentage of retainer used). Some firm’s present the report at a weekly attorney meeting and determinations are made regarding additional retainers to request. Other firms assign the responsibility to the firm administrator to automatically bill for the additional retainer. It is also important to ensure that ongoing work is managed in a way that an excessive amount of work is not committed to a matter until the additional retainer replenishment is received.

A retainer replenishment report is not a standard report in many billing systems. Law firms often have to create a custom report in their billing system using a report writer or in a worst case drop an accounts receivable report to an Excel file and add in some columns for the other information.

Here are the suggested data fields/columns for such a report:

Many family law firms have advised me that after learning the hard way they are now doing a good job at this and advising me that they have minimal accounts receivable issues.

Law Firm Billing Software – Cloud-Based vs. Desktop 

Subscription cloud-based billing programs are easier to learn and use than many of the desktop systems that have been available for years. In part, this is due to limited function and capabilities. However, user simplicity is only part of the equation. The bigger question is whether the software will meet a law firm’s needs. Many of the cloud-based programs were designed for solo practitioners or very small firms with limited reporting requirements. While these programs are getting better and inheriting more features they are still not up to par with the older desktop programs. Limitations include:

By the time the cost of additional accounting software is added that a firm has to have and add and maintain for the number of users  – subscription cloud-based solutions can get expensive for a firm with many users. The cloud-based billing software alone may cost between fifty to one hundred dollars per user per month. This cost will be offset by savings on hardware, IT support, user training, managing software updates, etc.

Cloud-based subscription billing software is getting better every year, is the wave of the future, and is a good solution for solo attorneys and very small practices. However, it does not have the functions and features that larger firms need. Prior to jumping into a cloud-based system a firm should analyze the reports that it is using now and what the firm needs out of its system and then compare requirements against the capabilities of each cloud-based system that the firm is considering.

Improving Law Firm Profitability 

Profitability can be increased by increasing revenue, decreasing expense, or increasing leverage – ratio of associates to partners. Most law firms do not have an expense problem – they have a revenue problem. Profitability improvement programs tend to be more successful when they concentrate on improving profits through increased revenue versus programs than focus on reducing expenses. A program that focuses on increasing revenue such as increasing billable hours, raising billing rates, and improving realization rates will yield better results. Programs that focus on expense reduction often do not yield satisfactory results in the long-term.

Improvement in leverage usually can only be achieved as part of a long-term program. Sudden sizeable increased in the number of associates may prove to be counterproductive if there is not sufficient client work to keep associates busy. Another option would be to reduce the number of partners through retirement and other options must be carefully planned.

Law firms should review their expenses to ensure that they are in line and if they are not make reductions that make sense. Then focus on the revenue side of the equation. Law firms should review their client base, practice areas, billing rates, flat fee rates, billable hours being worked by partners and associates, and realization rates. Then identify problem areas and chart out a course of action.

Until next time.

John W. Olmstead, MBA, Ph.D., CMC, is a Certified Management Consultant and the president of Olmstead & Associates, Legal Management Consultants, based in St. Louis, Missouri. The firm helps law and other professional service firms improve the operations and management of their practices and the lives of their practitioners. The firm, founded in 1984 serves clients across the Globe assisting them with implementing change and improving operational and financial performance, management, leadership, client development and marketing.

John’s assignments have covered the spectrum of management issues. However, in recent years most of his time has been focused on engagements helping firms in areas:

John is the author of a recently published book, The Lawyers Guide of Succession Planning: A Project Management Approach for Successful Transitions and Exits, , Published by the American Bar Association, John was Editor-in-Chief of “The Lawyers Competitive Edge: The Journal of Law Office Economics and Management,” published by Thomson Reuters for twenty-four years. He is currently serving as Past Chair, Illinois State Bar Association Standing Committee on Law Office Management and Economics and as a past member of the Legal Marketing Association (LMA) Research Committee. John may be contacted via e-mail at

jolmstead@olmsteadassoc.com.  Additional articles and information is available at the firm’s web site:

www.olmsteadassoc.com and blog http://blog.olmsteadassoc.com

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