Not Quite "Dancing with the Stars," but...
It's not quite "Dancing with the Stars," but your performance as a law firm will be judged on numerous factors nonetheless.
The firm's performance is important because it generates profitability. In particular, the performance generates profitability through the interaction of these fundamental factors:
- Revenue (whether tracked by attorney, practice area, or office)
- Billing rates (whether hourly, blended (an average), fixed fee, or other measure)
- Utilization (the percentage of a workweek—usually expressed as an annual average—that a lawyer actually bills)
- Realization (the amount of time actually billed and collected)
- Leverage (defined as the ratio of nonpartners—associates, paralegals, staff—to partners)
- Expenses (related to both operations and compensation, as a percent of revenues)
- Collection rate (the speed at which billable work is turned into cash receipts)
In the simplest of terms, profit can be determined by taking the total annual gross revenue by client and subtracting the costs associated with serving that client, including how long the firm has to wait for the payments. Billing rates and realization percentages are key markers of any firm's financial strength.
Try looking at your standard rates and at your blended average billing rates by category of timekeeper. Are you able to bill premium rates? Must you frequently offer discounts? How do your rates compare to those of your competitors? The answers can be revealing.
Realization is sometimes discussed in two levels:
- Percent of billable or booked hours billed (billed-to-billable ratio)
- Percent of billed work collected (collected-to-billed ratio)
The goal is to have a high collected-to-billable ratio. An overall financial ratio of less than 80 percent to 85 percent is a recipe for trouble. An overall ratio of greater than 95 percent may mean your rates are too low—clients could be paying quickly because the amounts are not burdensome to them.
Although there might or might not be a celebrity element involved in your particular firm performance, the results clearly matter.
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