How do you measure financial performance?

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Published on 5/22/06

What management reports do sole and small-firm practitioners look at to determine how well they're doing? It's a very good question. There is much data out there, and most good financial information systems can and do produce far more information/data than an attorney can use or assimilate intelligently.

I believe the only practical approach is to decide what it is that is important to you to help you reach your goals, and then look at that information.

First and foremost, in my mind, is the development of a cash flow statement. Prepare a forward-looking budget of cash receipts and payments for the next 12 months. Keep that statement on a rolling 12-month cycle such that as you conclude the current month, you look at the 12th month and add it into your budget, adjusting all the other months if needed based on new information.

Next, keep your aged accounts receivable listing always at your elbow to make sure that your clients are paying you in accordance with their agreement. If they don't, "fire" them and move on to the next client. Don't let them waste your time or build up the amounts they owe you.

If you do these two things, you will be far ahead of the curve.

You can look at other areas of measurement as well, such as realization rate (the amount of time you have worked and billed, and the amount of that billed time that has yet to be paid). Look at your bank balances, obviously. Look at how quickly your clients pay. What is your accounts receivable turnover?

All these and other metrics are important. But, above all else, spend your time focused on marketing for new work, doing the work brought to you and collecting that which you billed. The rest will fall into place.

For a lawyer, good business ultimately is simply about mastering the three-part cycle that drives any business:

  • win the business (the sales and marketing function);
  • do the work as effectively and efficiently as possible (the production function); and
  • get paid (the collections function, which is inseparable from basic finance).

These three elements are the essence of what I call "business competency." It doesn't involve mastering all the management jargon out there, or looking at things though the eyes of an MBA.

Many lawyers, whose undergraduate and law school training had little practical business focus, think either they can't or shouldn't be business-minded. But the lawyer who has business competency understands the operation of the firm as a business (budget, collections, profit, loss), the firm's billing structure, how firm profitability is determined and the importance of clients.

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