GROSS FEES are VANITY
PROFIT is SANITY
CASH is REALITY
Focus on Fees
There is often a focus in legal firms on fees. Whilst adequate fee earning is critical to the business it is not the end of the story.
Firms can often tell you the total gross fees (turnover) for the last year. Few can tell you what the profitability of the firm is or is likely to be at the end of the coming financial year.
Some firms incentivise the delivery of fees by their fee earners, by offering a bonus if the fee earner exceeds their annual target.
Profit by Department/Team
Even fewer firms can tell you the profitability of each of the Departments in the business.
The Heads of Department should be made accountable for their department’s contribution to profit as well as the delivery of fees.
Focus on Cash
However, cash is often overlooked or disregarded by managers and fee earners until it becomes too late.
The vital importance of cash cannot be overlooked. Indeed, if the COLP comes to the view that the practice is no longer financially viable then they are under an obligation to report this to the SRA. In certain circumstances the SRA will intervene.
Cash Flow Pipeline
It is important to understand that cash flow begins with stage 1 below and ends with cash in the bank to pay bills and dividends to your shareholders.
- Setting the right fixed fee or hourly charge out rate that will enable the firm to at least break-even on its annual cost budget for salaries etc.
- The acquisition of sufficient quantity of clients paying a high enough fee for the right profile of work done to make a profit.
- The obtaining of sufficient payments on account to cover not only disbursements but foreseeable profit cost.
- The delivery to the client of regular interim bills (mopping up the WIP to date) and timely final bills. The timely processing of bills by the firm’s Cost Draftsman.
- Obtaining payment of those bills from the client within no more than 30 days of the bill being delivered.
- The immediate transfer of the file from the Fee Earner to the firm’s debt recovery manager if the bill is still outstanding at 30 days.
- The issue of a protocol letter and proceedings, if necessary, should the client fail to pay.
- Recognising when the debt becomes unrecoverable and writing it off under the authority of a senior manager.
- Including in the annual budget a provision for likely write-offs and increasing prices accordingly to ensure that the firm is not ultimately out-of-pocket.
Cpm21 analysis and Support
CPM 21 will analyse the firm’s cash pipeline and provide a report and assistance on key improvements that can be made.