December 2015 Bar Bulletin
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Talking about Fees: A Top Line Q&A

By Peter Roberts

 

We all come to the table with differing views of the numbers. What numbers are most important? What do the numbers mean? How are they prepared? Are there trends? For now, let’s talk about the “top line” because this is what you have the most control over.

What Is the Top Line?

Simply put -gross fees. Most law firms use cash received as gross fees. This means you are taxed on what you receive, not on what you bill. If you are one lawyer or 100, please use an accounting software application. QuickBooks dominates the solo and small-firm sector, and any bookkeeper knows QuickBooks. A bookkeeper familiar with law firms (this is very important for trust accounting) can set you up correctly at the outset.

The top line matters because cash in the door enables you to pay yourself, but only after you pay your staff and other office costs. But the top line is only part of the story behind cash received.

Interpreting the Top Line: What Is There To Understand?

Time recorded may not reflect fully the effort used for the matter. One observer suggests about 15 percent of time spent never appears in the billing. Now you are at roughly 85 percent of the work performed. Your gut tells you to write down 10 percent due to some wheel spinning. This discount brings you to roughly 75 percent of the work performed. The client asks for a deal in which you agree to cut another 10 percent for prompt payment. You now have earned roughly 65 percent of the value of the performed services. You start to think, “Maybe I should offer flat fees and be as darned efficient as possible.” I agree, when the scope of representation is adequately defined.

It is very important to use a “pipeline report” that tracks fees worked, fees billed and fees collected by each timekeeper. The percentage relationships among these amounts are called “realization.”

Look at it this way: You bring a potential 2,080 hours (52 weeks times 40 hours) to your practice each year -not including weekends and evenings. You cannot bill that number of hours because you administer your practice, attend CLEs, get sick, enjoy a vacation, develop business, offer pro bono services and get stiffed by one or more clients each year. I will give you 1,180 hours for these reasons or close to 60 percent of your available time. Sixty percent!

The balance of 900 hours equals about 17 collected hours per week if spread across 52 weeks. You may prefer to spread the 900 hours across 48 weeks to allow yourself a vacation. At $200 per hour, that derives $180,000 in gross fees collected. Compare this tally to where you are and use it as a benchmark and budget.

Are There Psychological Issues I Need To Know About?

I believe there are psychological (for lack of a better term) issues whether spoken or not. The numbers can be threatening. Too much emphasis on the numbers may harm your firm’s humanistic culture.


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