Financial Management Techniques for Today's Law Office
| Publication year | 1986 |
| Pages | 238 |
| Citation | Vol. 15 No. 2 Pg. 238 |
1986, February, Pg. 238. Financial Management Techniques For Today's Law Office
Some lawyers are excellent business-people; others simply do not have enough time to devote to the business side of their practice. However, increased competitive pressures, combined with the recent rise in malpractice insurance premiums, have given new meaning to the importance of law office administration. Recent studies reported in the ABA Journal have concluded that 33 percent of malpractice claims are the result of defective law office management, while other studies suggest the number may be as high as 70 percent.(fn1)
Competitive pressures are compounded in Colorado because of the abundance of lawyers. Recent demographical information reveals that there is one law firm consisting of four or more members for every 12,000 people in Colorado. In other states in the region, this ratio is one firm for every 20,000 to 25,000 residents.(fn2)
The following questions focus on critical areas of internal financial management that frequently need attention.
1) Is the firm in a "cash poor" situation when profit-sharing time comes along?
2) Are the accounts receivable in excess of 15 percent of annual revenue and still growing?
3) Is there a suspicion that too much revenue is being lost between hours worked, hours billed and fees paid?
If one or more of these questions can be answered affirmatively, the firm's financial systems and procedures may need to be reviewed and updated.
A common problem in many organizations is a lack of attention and planning in the cash flow area. Capital expenditures often consume large amounts of cash that increase the fixed assets of the firm but result in a cash squeeze. Each outlay of cash for a capital purchase could be viewed as a subtraction from net income for purposes of cash flow analysis.
Firms regularly should receive and review a complete cash flow statement which includes the balance sheet sources and uses of funds. For example, a firm may have a $100,000 year-end net profit and a non cash (depreciation) outlay of $5,000, for a total of $105,000 income from operations. Before analyzing capital or balance sheet expenditures, it may appear that this amount will be readily available for a year-end distribution. A closer analysis...
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