Published on 5/17/10
Mr. Micawber, the neer do well character in David Copperfield, gave the basics for simple financial planning long ago: 20 pounds in income and 19 pounds in expenses equals happiness; 20 pounds in income and 21 pounds in expenses equals misery.
Every law firm is a business and every business needs a financial plan; ironically, that is the planning element on which most law firms spend the least amount of time.
The financial plan is the true guide to the firms success or failure. Although it could involve many kinds of spreadsheets, charts and budgets, the simplest and most powerful plan of all is one that is visual and readily understandable.
Admittedly, todays financial information systems and software can and do produce extremely detailed assessments of financial performance to benchmarks, including the vital tracking of cash flow performance. However, many of these programs tend to provide far more data than can be assimilated intelligently.
When you take your car to the shop, the mechanic can give you a detailed picture of performance under the hood by hooking up engine analyzers, lab scopes, compression gauges, onboard computers and a host of other equipment. When youre driving, though, all you want to do is glance at the dashboard and see how fast youre going, whether the engines running hot or cold, and how much gas you have left.
The best financial plans are those constructed to give the firm a dashboard view of its financial performance. These have important financial metrics displayed in an easy to understand visual format that speaks graphically to law firm management.
Certain basic rules define the dashboard:
- Be visual and visually appealing, using either bar graph or line chart format;
- Do not try to present too much information on one graph;
- Measure performance (current actual) against prior actual and current budget figures;
- Present 13 months of data: the current 12-month trend plus the same month of the prior year; and
- Use longer timeframes when appropriate. A graph of profits per partner, for example, might show five years of results.
What financial information should the digital dashboard display? Although there will be some variation by firm, the fundamental data should focus on profitability. Charts should progressively show gross revenue (by client, practice area, the full firm), identify relevant costs, and show how long the firm has to wait for payment.
Relevant measures for graphing include:
- billing rates, whether hourly, blended (an average), fixed fee or other measure;
- utilization, the percentage of an average workweek that a lawyer bills;
- realization, the amount of time actually billed and collected;
- leverage, defined as the ratio of non-partners (associates, paralegals, staff) to partners; and
- expenses, related to both operations and compensation, as a percent of revenues.
The most important goal of creating and evaluating a financial dashboard is to spot problems quickly and adjust the firms activities so that financials remain positive.
When properly displayed in an understandable format, the dashboard can take the mystery out of financial data and make it clear whether the firm has a smooth trip ahead or is about to run out of gas.
