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:
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%.
The significant March 2018 fee billing write-off/premiums were for:
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%.
The larger March 2018 accounts receivable write-offs and invoice fee credits were for:
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”):
- 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:
- $49,896 of that time value (which the partners paid for through timekeeper compensation and overhead) was written-off—a fee billing realization loss.
- Just $739,776, or 93.7% of the original value (the fee billing realization rate for the month), was invoiced to clients.
- 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.
- Year-to-date the firm removed $2,237,421 of time value from unbilled time inventory and:
- Wrote-off $77,640 (year-to-date fee billing realization loss) and invoiced clients just $2,159,781
- Fee billing realization rate is 96.5% year-to-date
- 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.
- 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!