THE PIVOTAL ROLE OF REALIZATION RATE ON LAW FIRM PROFITABILITY, PART 4

Oct 30, 2018 8:55:00 AM | Michael Marget

Law Firm Accounting: Realization Reporting

Welcome to the fourth and final blog installment about realization in law firm profitability. This installment tackles reporting, which is often the number one responsibility that managing partners entrust to their law firm’s CFO.


All modern law firm accounting software packages track both fee billing and fee collection realization. Most can breakdown this this data by billing attorney, timekeeper, practice group, office location, area of law, or fee arrangement (i.e., hourly, flat fee, or contingency). However, dumping large reports on the partners is not the best way to share information. The test of any good financial management reporting we do as law firm managers is whether the information presented is meaningful to the readers. While I firmly believe numbers can tell wonderful stories, a law firm CFO must be a “numbers whisperer” to help the partners understand what the numbers are saying.


Painting a Bigger Picture for Law Firm Partners

My typical approach to realization reporting involves painting a “big picture” so the partners can appreciate the magnitude of realization in context to the current year. This bird’s eye view involves four simple charts and some narrative. Something like this:


Fee Billing/Realization⁴

Law firm invoices to clients totaled $739,766 after writing down original time value by $49,896. March 2018 fee billing realization was 93.7%. March 2018 year-to-date fee billing realization was 96.5%. Fee billing realization for 2017 was 97.5%.

 

Billing Analysis – March 2018

Chart #3A

Hours

Realization

Time Value

Realization

Effective Rate

Removed from WIP

4,278.1

100%

$ 789,672

100%

$ 184.58

Write-ups(downs)

-38.3

-0.9%

-49,896

-6.3%

-11.66

Amount Invoiced

4,239.8

99.1%

$ 739,776

93.7%

$ 172.92

 

Billing Analysis – Year-to-Date through March 2018

Chart #3B

Hours

Realization

Time Value

Realization

Effective Rate

Removed from WIP

12,262.3

100%

$ 2,237,421

100%

$ 182.46

Write-ups(downs)

-136.7

-1.1%

-77,640

-3.5%

-6.33

Amount Invoiced

12,125.6

98.9%

$ 2,159,781

96.5%

$ 176.13

 

The significant March 2018 fee billing write-off/premiums were for:

Chart #3C

Billable hours

Original fee value

Write-up (down)

Invoice net fee value

Net Realization

Effective Rate

John Jay Insurance

1,479.3

$ 261,652

$ -22,682

$ 238,970

91.3%

$ 161.54

Rutledge Specialty

36.2

8,663

-1,663

7,000

80.8%

193.37

Cushing Indemnity

155.7

29,394

-12,535

16,859

57.4%

108.28

Taney Medical

17.0

3,400

1,600

5,000

147.1%

294.12

Blair Underwriters

94.5

18,878

-1,888

17,000

90.0%

179.89


Fee Collections⁵

March 2018 fee revenue was $683,894 after collection write-offs totaling $40,722. March 2018 fee revenue realization was 94.4%. March 2018 year-to-date fee revenue realization was 97.6%. Fee revenue realization for all of 2017 was 98.0%.

Chart #4

March 2018

March 2017


Variance


Var. %


2018 YTD


2017 YTD


Variance


Var. %

Original AR value

$ 724,616

     

$ 1,907,257

     

AR write-up (down)

-40,722

     

-46,014

     

Net Fee Revenue

$ 683,894

$ 892,596

$ -208,702

-23.4%

$ 1,861,243

$ 2,238,930

$ -377,687

-16.9%

Expense Revenue

21

59

-38

 

611

59

552

 

Retainer Revenue

1,681

-7,731

9,412

 

616

-18,173

18,789

 

Total Revenue

$ 685,596

$ 884,925

$ -199,329

-22.5%

$ 1,862,470

$ 2,220,816

$ -358,346

-16.1%


The larger March 2018 accounts receivable write-offs and invoice fee credits were for:

  • John Jay Insurance -- $2,815 (write-off)
  • Cushing Indemnity -- $1,048 (write-off)
  • Iredell Protective Company -- $11,453 (write-off)
  • Johnson & Paterson -- $2,314 (write-off)
  • Chase, Ellsworth -- $7,484 (write-off)
  • Washington & Moore – $10,850 (fee credit)

_____________________________

⁴ See, Reports #301 (Monthly Fee Billing Realization); #302 (YTD Fee Billing Realization).

⁵ See, Reports #410 (Cash Receipts Report); #421 (Monthly Net Realization); #422 (YTD Net Realization).


Footnotes 4 and 5 that accompany the charts and narrative direct those who might be interested to refer to the detail reports which are the source of the information. In the detail reports, partners can trace the numbers to computer-generated information where they will find the underlying data sorted by client, timekeeper, billing attorney, practice group, area of law, and fee arrangement, all for their perusal or inquiry.


The intention of the charts and narrative in Illustration #3 is to convey the following information (without being “too preachy”):

  1. The firm removed $789,672 of time value from the unbilled time inventory during the preceding month and billing attorneys did the following with it:
    1. $49,896 of that time value (which the partners paid for through timekeeper compensation and overhead) was written-off—a fee billing realization loss.
    2. Just $739,776, or 93.7% of the original value (the fee billing realization rate for the month), was invoiced to clients.
    3. Billable time which was worked at $184.58 per hour (the effective hourly worked rate) was reduced to just $172.92 per hour as invoiced to clients.
  2. Year-to-date the firm removed $2,237,421 of time value from unbilled time inventory and:
    1. Wrote-off $77,640 (year-to-date fee billing realization loss) and invoiced clients just $2,159,781
    2. Fee billing realization rate is 96.5% year-to-date
    3. Prior year’s fee billing realization rate was 97.5% meaning the firm is performing less well than last year in terms of managing its fee billing realization losses.
  3. Chart #4 is intended to convey the same message about fee billing realization—for the month and year-to-date.

The Illustration #3 format has evolved over the years and has worked well for me in terms of setting up discussions about ongoing realization issues with law firms.  Find a format that works for you; the important thing is to track the numbers and report, educate, and begin a conversation to raise awareness. There is an adage—you are what you measure. My advice: start measuring. Because if you can’t measure it, there’s no way to manage or improve it.

This concludes my four part series on the role of realization rate on law firm profitability. I hope you’ve found it informative and valuable. If you want to learn more about law firm realization rates or look into the outsourced accounting services 4L can provide to your firm, contact us today. We look forward to helping your firm grow!

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Michael Marget

Mike Marget is an erstwhile large law firm manager with tours of duty as COO at Katten Muchin, Jenner & Block and CFO at Holland & Knight, among others. He’s currently president of 4L Law Firm Services which provides accounting, bookkeeping and related back office services to small/midsize law firms and co-CEO of NSource, LLC, a law firm consultancy. His blog, Law Firm CFO, is dedicated to every law firm manager who has ever asked the question, “Why me?”
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