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Chapter 8 Billing and Financial Management. Billing Should Be Regular and Frequent. Monthly billing is the most common method of billing. Clients prefer smaller monthly bills. A client’s perception of the value of legal services diminishes with time. Bill Must Be Effective.

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billing should be regular and frequent
Billing Should Be Regular and Frequent
  • Monthly billing is the most common method of billing.
  • Clients prefer smaller monthly bills.
  • A client’s perception of the value of legal services diminishes with time.
bill must be effective
Bill Must Be Effective
  • Descriptive bills
  • Bills that are correct
    • Errors in math
    • Typographical errors
  • Client perceives the value to the service
    • “Nickle and Dime” charges
the billing process
The Billing Process
  • Timesheets prepared by attorney/paralegal
  • Data entry into time and billing progam
  • Pre-bill generated for review and edit
  • Final bills generated
  • Management Reports generated
    • Aged accounts receivable
    • Productivity reports
    • Other reports
statutory requirements for legal bills
Statutory Requirements for Legal Bills
  • B&P Code section 6148
  • All bills must clearly state:
    • Amount of the bill
    • The rate charged
    • The basis for the calculation of charges and costs
  • Must be furnished to client 10 days following request or every 30 days
block billing
“Block Billing”
  • Where multiple tasks are billed as a single entry of time and charges
  • Example:
    • “Research, draft motion for continuance, conf. with attorney Jones re: hearing date and attend hearing on motion for continuance –

25hours - $6,250.

elements of a legal bill
Elements of a Legal Bill
  • Name of the case
  • Billing period
  • Date of the work
  • Description of the work
  • Time increment
  • Name of person performing the work
  • Hourly rate
  • Cost of the work
  • Itemization of costs
  • Total costs
  • Total fees and costs
  • Payment terms
common unethical billing practices
Common UnethicalBilling Practices
  • “Padding”
  • Applying a client’s funds to a disputed fee
    • Trust account transfers
  • Charging more than a client agreed to pay
  • Charging for services not rendered to a client
common billing problems
Common Billing Problems
  • Vague descriptions
  • Perceived poor work

(review and revise)

  • Nickel-and-dime billing
  • Team churning
  • Interoffice conferences
  • Errors in arithmetic
  • Sent to wrong person or address
  • Padding
  • Clerical work
  • Block billing
  • Billing for costs not agreed to
  • Delegable tasks – task performed by appropriate person
computerized billing and time accounting
Computerized Billing and Time Accounting
  • Most firms use some variation of computerized time and billing software
    • Traditionally these were in-house software systems
    • Maintained by the firm
  • SaaS (Software as a Service)
    • Hosted by the vendor
    • Available over the internet
    • Vendor provides maintenance and support
    • Vendor charges monthly fee
e billing
E-Billing

E-billing – a process that allows invoices to be presented to the client over the internet.

Typical e-billing flow chart:

profitability factors
Profitability Factors
  • Direct
    • R ates
    • U tilization
    • L everage
    • E xpenses
    • S peed
  • Indirect
    • S trategy
    • C ulture
    • O rganization
    • R eward systems
    • E Environment
two types of expenses
Two Types of Expenses
  • Compensation
    • Associates and paralegals
    • Administrative staff
    • Employee benefits
  • Operating
    • Occupancy costs
    • Financing costs
    • Office operating costs
common expense catagories
Advertising

Bank Charges

Books and Publications

Costs Advanced

Depreciation (non-cash)

Employee benefits

Equipment Rental

File Storage

Insurance

Liability

Malpractice

Workers Compensation

Interest

Travel/Meals

Office Supplies

Professional Dues

Rent

Salaries

Taxes

Employment

Property

Telephone

Temp. Services

Utilities

Common Expense Catagories
accounting systems
Accounting Systems
  • Accounting system tracks
    • Income
    • Expenses
    • Accounts receivable
    • Accounts payable
  • Provides additional management reports
    • Profit and loss statements
    • Balance sheets
    • Cash flow reports

=

profit loss statement
Profit & Loss Statement

Income:

Income – legal fees $1,350,247

Total Income $1,350,247

Expenses:

Depreciation* 25,250

Salaries 550,000

Rent 400,000

Taxes 35,000

Advertising 20,000

Interest 15,000

Office Supplies 27,000

Total Expenses $1,072,250

Net Income $ 277,997

balance sheet
Balance Sheet

, Assets

Current Assets:

Cash in bank $75,000

Client Trust account 10,000

Fixed Assets:

Office equipment $100,000

less: Depreciation (20,000)

Vehicles 60,000

less: Depreciation (5,000)

Total Assets $220,000

(Cont.)

balance sheet cont
Balance Sheet (cont.)

Liabilities and Owner’s Equity

Current Liabilities:

Bank Line of Credit $50,000

Accounts payable 7,500

Other Liabilities:

Client trust liability $10,000

Total Liabilities $67,500

Owner’s Equity $152,500

Liabilites and Owners Equity $220,000

balance sheet formula
Balance Sheet Formula
  • Assets = Liabilities + Owner’s Equity
cash flow statement
Cash Flow Statement
  • A report that details the cash received and cash expended by the business for each month.
  • Composed of:
    • Beginning cash on hand
    • Cash receipts during month
    • Cash paid out during month
    • Ending cash on hand
accounting methods
Accounting Methods

Cash Accounting:

Receipts are recorded on books upon receipt

Expenses are recorded on books when paid

Billings or WIP are not reflected on books

Most small firms use cash method accounting

Accrual Accounting:

Records income when earned

Records expenses when incurred

types of accounting systems
Types of Accounting Systems
  • Stand alone systems
    • Quick Books
    • Peachtree
    • Sage
  • Integrated systems
    • Systems that include billing and accounting in a single system
budgeting process
Budgeting Process
  • Project total overhead for the year
    • Personnel costs/compensation
    • Operating expense
  • Project number of billing attorneys/paralegals and target rate for each
  • Estimate number of billable hours per year
    • Calculate realization rate - % collectable
  • Project gross billings or gross income
  • Adjust the rate, billable hours or overhead to balance budget
law firm financial ratios
Law Firm Financial Ratios
  • Annual billable time
  • Attorneys (partner) income as a percentage of billings
    • 60-65% of realized billings
  • Associates salary as a percentage of billings
    • Salary should be 1/3 of billings
    • Not realized billings
  • Realization Rate
    • Percent of bills collected
    • Target is 95% - most firms 80-90%
  • Aged Accounts Receivable
    • Collection rate is 67% of accounts over 120 days old
law firm banking
Law Firm Banking
  • Bank Accounts
    • General Operating Account
    • Client Trust Account
    • Payroll Account
    • Costs Advanced Account
  • Credit Facilities
    • Lines of Credit
    • Equipment Loans