Aug. 6, 2014 – Time is money, literally, especially for lawyers and others individuals in service-based professions. Thus, the financial management of a law firm, whether small or large, is basically the management of time, says business coach Tom Palzewicz.

“Lawyers don’t have a product to sell. They don’t have a gross profit margin,” said Palzewicz.  “It’s just figuring out how to pay somebody to be a lawyer in the firm and how much to charge for them. For solo practitioners, the same rule applies. You are simply determining how much to charge based on what you want to pay yourself.”

Palzewicz, who worked more than 15 years in finance and small business management, is now a business coach outside Milwaukee. His franchise, ActionCOACH, provides business owners with the tools and information to achieve good business results.

Some of ActionCOACH’s clients are lawyers, and some of them struggle with financial management because they haven’t fully grasped the business concepts that apply.

“Attorneys understand how to help their clients, but many of them don’t understand how to run a business. That’s largely true of anybody who is selling a skill. The good news is that learning how to run a business is another skill that can be learned,” he said.

Palzewicz will be teaching business concepts, and financial management in particular, at the State Bar of Wisconsin PINNACLE Business School for Lawyers, an initiative with ongoing sessions to help lawyers learn more about the business of law practice.

Not Complicated

The term “financial management” may sound intimidating or time consuming, Palzewicz says, but it doesn’t have to be. Most law firm business models are straightforward.

“What lawyers have to decide is how much money they want to make and how much time they want to spend making it,” Palzewicz said. “Everything revolves around that.”

Consider the following example: The lawyer determines that he or she has $5,000 per month in fixed costs to pay the rent and other costs. The lawyer wants to make $5,000 in profits every month. The lawyer must generate $10,000 in monthly revenue.

“That means the lawyer must bill 50 hours per month at $200 per hour,” Palzewicz said. “If you want to charge $100 per hour, it’s going to take you twice as long to get there.”

For newer or less experienced solo lawyers who may need to charge lower rates, they’ll have to work more hours to meet their financial goals. Seems like common sense.

“But we see a lot of lawyers who are simply not billing enough to be profitable,” Palzewicz said. “A lot of attorneys who are really struggling are doing a lot of work but they aren’t making any money. It’s because they’ve set their rates too low.”

Of course, it’s not as simple as just raising the rates. Billing rates will vary by practice area, experience, and competition. In addition, many clients are driving attorneys away from the billable hour based on a preference for alternative billing arrangements.

Thus, if the hourly rate cannot go up, something else must go down. “You have to look at fixed expenses,” Palzewicz said. “Is there anything that you can do without?”

For law firms with multiple attorneys, Palzewicz says a three-to-one ratio is a good rule of thumb. That is, if the firm is paying an associate $50 per hour, the billing rate should average around $150 so the firm can pay the associate and leave $100 to pay the firm.

Other Financial Management Considerations

Palzewicz says lawyers, especially solo practitioners, should not underestimate the value of having an administrative assistant on board. Lawyers without one may be eating valuable time that could be devoted to legal work at much higher rates.

“You think, I don’t need an assistant, I can handle that myself. But now you are paying yourself $20 per hour to do those tasks. If you were doing legal work instead at $200 per hour and paying the assistant $20 per hour, now you are making $180 per hour.”

Palzewicz says it’s important for lawyers to keep track of the time spent on administrative tasks and consider whether that is time better spent elsewhere.

Constantly analyzing profitability is a major component of financial management, to be sure, but there are many other considerations when it comes to building a law practice.

For instance, lawyers must think carefully when it comes to the costs of acquiring clients. If lawyers want to spend money and time to attract the business of a potential client, they should ask whether that client will be worth it in the long-run.

“Let’s say you have to spend 50 hours attracting a new client. If you could have been billing out at $200, you just lost $10,000.” Palzewicz said. “The client’s business better generate a lot more than $10,000 in order for your business to recover from that.”

But let’s say you acquired the client and you’ve done the work. Now, how are you going to get paid? “Attorneys are not very good at collecting money,” Palzewicz said.

“They invoice infrequently and then they hope that people pay,” he said. “It’s important for them to set the right expectations at the beginning of the process, and then do progress billing every step of the way. This keeps the positive cash flow moving.”

Assemble Your Team, Learn the Business

Palzewicz says every business should have four trusted advisors: an accountant, a lawyer, a banker, and a business coach. Lawyers should avoid representing their own business interests, Palzewicz says, because those interests may not be tended.

“They say the cobbler’s kids always have the worst shoes,” Palewicz says. “Or accounting firms always seem to have the worst financial records. All businesses do this. They are good at helping others but not so great at helping themselves.”

Palzewicz also says a business coach can help lawyers identify areas of improvement and can explain the business strategies that keep the law firm on a steady course.

Learning financial management and other business concepts is going to help your own business. But it’s also going to help the lawyer be a better advisor to business clients,” said Palzewicz. “A lot of legal issues arise from bad business management.”

Business School for Lawyers

Palzewicz will speak on financial management at “BSL 301: Business Principles for a Successful Law Firm,” on Sept. 16 at the State Bar Center in Madison, just one business topic among many at this day-long Business School for Lawyers session.

He’ll dig deep into profitability analysis, client acquisition costs, cash flow forecasting, and managing accounts receivable, among other financial management topics. To review the sessions, the schedule, or to register, visit the BSL webpage.