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Financial Management For the Non-Financial
Professional
Presented by:The Florida Bar’s
Law Office Management Assistance Service(LOMAS)
850-561-5616
What this course will cover Learning financial management skills
will positively impact your efforts at managing all the other aspects of the business.
Planning Reporting and budgeting Human Resources Facilities and Purchasing Systems and Technology
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What this course will cover Financial Management Basics Strategic Planning Basic financial statements/reports Compensation Budgeting and Reporting Paralegal Utilization Internal Controls and Warning Signals Trust Accounting, Holding Client Property
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How to withstand a slow-down in the economy
Define your marketplace and market niche Learn how to plan. Service businesses:
60% to 80% of your gross revenues are tied up in Occupancy and Personnel costs The most difficult expense categories to change
quickly Cross-train, automate fully, employee leasing Leasing exit strategy, back door. . .
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More on controlling costs
Avoid overtime Bonuses do not increase base wages for overtime
calculations
Part-time staff do not expect group benefits Job sharing
Control purchasing Standard supply inventories
Inventory everything Budget comparisons
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STRATEGIC PLANNING
Two words that scare the heck out of most business owners and managers.
Strategic planning is not marketing. Strategic planning is not about grand
ideas and mission statements. The planning horizon for most service
businesses has changed from “The Five Year Plan” to “The Two Year Plan.”
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What is Strategic Planning?
Key Elements: Top down planning process. Goal with measurable objectives.
e.g., “What should be our optimal market share?” How large should we be for optimal profit margin?
Law Firm with 100 people – 39% profit margin Law Firm with 10 people – 39% profit margin 39% of what?
Analysis of Resources. What do we need to get there? Regular status meetings. Budget, staffing, funding.
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How to learn to plan Being a planner is a learned skill for most people
Forty percent of the public are not planners, it is not in their nature, but everyone can learn how to plan.
Are you a planner? Carl Jung, Myers-Briggs, Kiersey Personality Sorter and more.
No-nonsense books from the ABA. Books from public libraries. Seminars from the American Management
Association, Skillpath.com, Chamber of Commerce. "You've got to be very careful if you don't know
where you're going, because you might not get there." (Yogi Berra).
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Finance Basics
The key is to have a benchmark or expectation to see why your actual figures differ from expectations, and take action based on this.
This is why having a strategic plan and budget are critical.
Use current and past financial statements, and current and past budgets, to create an expectation.
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5 Basic Financial Reports
Balance Sheet
Income Statement
Statement of Cash Flows
Owners’ Equity Statement
Budget
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The Balance Sheet
Shows the financial position of a company at a specific point in time.
Assets = Liabilities + Equity
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ABC Law Firm, P.A.Balance Sheet Comparison
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The Income Statement
Reports on a company’s revenues and expenses over a period of time.
A good chart of accounts is essential. Detail, detail, detail!
The chart of accounts should reflect the way your law firm is organized, e.g.: Reproduction Expense Marketing Expense Technology Expense
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Excerpt of Actual to Budget Comparison with a goal of some retained earnings for technology
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Reconciles net income to the change in cash by showing the sources and uses of cash.
Statement of Cash Flows
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Cash Flow Statement
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Owner’s Equity Statement
The owners’ equity statement outlines the changes in the owners’ equity accounts during the year.
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Members’ Equity
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Putting It All Together
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How Financial Statements Relate to Each Other
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Capitalization
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Capital required to:
Finance Salaries (secretary,
associate, paralegal)
Overhead (rent, utilities, supplies)
Equipment
Invest in New Markets
Why does a Firm need Capital?
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Benchmarks for Capital
Large Firm (>$10M) 2 Months
Operating expenses
Medium ($2.0M to $10M) 1.5 months operating expenses
Smaller firms (<$2.0M) 1 month
Old benchmark: 6 months operating expenses
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How to Retain Capital?
Cash basis, service businesses should consider a special “tax distribution” to cover owners’ capital call.
If you are a C-corporation, pay a bonus to shareholders, withhold the taxes, and have them endorse the check back to the firm – “Re-Capitalize”.
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New Owners
New Owners should be required to make a capital contribution.
The firm needs capital to operate. You want to create entrepreneurial
partners. People do not value what they get for
free.
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Compensation
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Compensation
One of the most critical elements in a any business
Drives behavior “You Get What You Reward.”
Must be perceived as fair by the professionals and owners of the business
If key personnel are all mildly dissatisfied with the compensation system, it’s damn near perfect.
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Objective Factors
Origination (Finder)
Manager (Minder)
Producer (Grinder)
Class – Employee Category?
Seniority?
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Subjective Factors
Leadership (or setting a good example) Keeping clients happy Training/Mentoring others Marketing/Community Involvement Technical Skills How do you measure these items?
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How do you Blend Objective and Subjective
When you have a Fixed Pool to work with?
10%
30%
20%
10%
10%
10%
5% 5%
FinderMinderGrinderLeadershipClient RelationsTrainingMarketingTechnical
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Types of Compensation Systems The “Going Rate”
The bare minimum to keep one from “going” (leaving). Lock Step
Someone retires and doesn’t tell anyone. Formula System
Requires strong intake control. Eat what you kill
Kills growth, specialization efforts Objective/Subjective
Requires work and planning and therefore is the most difficult to implement
Provides biggest rewards to management
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Reporting and Budgeting
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What Financial Reports should I Review Monthly?
Detailed Income Statement against budget with budget Variances
Balance Sheet Bank reconciliation reports Overtime, sick & vacation reports Realization (collections/billings) Billings Billable Hours WIP and A/R Aging
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Why Budgets are Important
Creates an expectation. Can help to identify fraud or unusual activity. Give a roadmap to make sure you have
a plan to operate successfully Is a guide and not set in concrete Budgets have four parts
Revenue Expenses Capital Needs Cash Flow
Budgets should be formatted against the chart of accounts!!!
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Income Statement vs. Budget Income statement should be reported with several
columns of information. This may require special programming to your software Actual expense for the month Actual expense YTD Budget allocation YTD Over/under budget for this period: Variance of ‘Actual
Expense YTD’ against ‘Budget Allocation YTD’ (per cash flow budget)
Annual budget allocation Over/under budget: What has not been spent as a
percentage of the total budget
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Example Income Statement Compared Against Budget Excerpt
February, Any Year
Var YTDExpense MTD YTD BTD BTD AnnBud v. AnnBud
Lounge 378 700 1,000 -30% 7,000 -90%
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Revenue Budget ExampleIndividual Professional
1,840 46 weeks x 40 hours per week
1320 hours on client files200 hours on marketing100 hours – file mgmt & staff supervision
100 hours on firm management/other120 hours – vacation/sick
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Timekeeping
Why keep time? Productivity Profitability Record of the work
Client relations Risk management
Billing
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Rev Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Tot
Prac#1
10 10 30 10 10 50 10 10 10 10 10 100 XX
Prac#2
10 20 10 10 60 10 10 10 10 20 15 90 XX
Prac#3
10 10 15 10 10 10 80 10 10 5 100 60 XX
Prac#4
10 10 10 10 10 70 10 10 10 90 10 30 XX
XX XX XX XX XX XX XX XX XX XX XX XX XX
Revenue Budget(in thousands)
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Cash Flow Budget
When you expect to actually pay for it During what months do you the need the
most amount of cash, the least amount of cash?
Will projected collections be enough to cover your monthly “nut” or will you need to draw down?
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Exp Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Tot.
Post 600 50 50 50 50 50 600 50 50 50 50 50 XX
OT 400 200 200 800 200 200 200 200 200 300 300 800 XX
InsOff
100 100 2000
100 100 2000
100 100 2000
100 100 2000
XX
Bon 0 0 0 0 0 9000
0 0 2000
0 0 2000
XX
*** XX XX XX XX XX XX XX XX XX XX XX XX XX
Cash Flow Budget
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Accounts Receivable and Work In ProcessThe Elephant in the Room
Tips on Collections and Accounts Receivable Aging
Manage clients beyond 60 days. Establish precedent with the client. Be sure to communicate the value delivered. Set Benchmark to collect a certain % (i.e. 40%) of
A/R each month. The closer the timing of service and
billing, the better chance for collection. Examine your intake process
Does everyone understand how you will be paid? Has the client signed their agreement?
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Establish a policy of frequently billing. Money held in WIP is costing the firm money, it has
already paid the salary and supply cost of creating the WIP, but is not enjoying the revenue.
Work to improve your current percentages over 30 days.
Just because it’s WIP does NOT mean it doesn’t have to be reviewed every month Good WIP vs. Bad WIP
Work in Process Aging
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Financial ToolboxOther critical reports
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Reports are Tools
You can have too many tools! Appropriate reports What criteria to include? A large percentage of the population is visual, and
graphs are easier to interpret for them. Not all FM software can do this The Daily/Weekly Report
Critical for start-ups
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Financial Reporting – Daily Report
Month: May (does not include atty comp)Date: 31-May
Totals
Cash on Hand 12,000Today’s Receipts 6,000 18,000
30 or less 60 90 120+
Accounts Receivables 26,000 13,000 23,000 9,654 71,654Work in Process 43,000 12,000 9,000 3,666 67,666
Total 139,320
Payables Due 15th 6,456Payables Due 30th 16,123Special Payables Due 5,000Payroll Due (date) 7,500Payroll Due (date) 7,500 (42,579)
Line of Credit Balance 0Loans Payable Balance 90,000
Hours PostedABC 160DEF 170GHI 180
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Digital Dashboard What other items should be measured
monthly/quarterly? Revenue per revenue generator
Cash Receipts Billings Realization Direct and shared overhead per revenue
generator Net Income per revenue generator Productivity – hours and supervision
Expenses Debt servicing
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Paralegal Utilization Generally, markets adjust themselves to salary and
billing rates. Rule of thumb: 500 collected hours is a break-even
point on paralegals, hours collected above that are profit.
Secretarial work is not paralegal work, although paralegals may perform both in the regular course of their jobs.
Rule of thumb: If, in the absence of the paralegal, an attorney would have performed the work, it’s billable.
Learn to leverage (push work down to the appropriate level).
See ABA handout material.49LOMAS
Trust AccountsTaking Care of OPM
View the LOMAS DVD “Maintaining a TRUSTworthy Account”
Internal ControlsHow to Protect the Innocent
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Initiation
Authorization
Processing
Recording
A goal of this element of internal control is segregation of duty, including:
Control Policies & Procedures
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Theft of daily deposit
Obtaining computer passwords
Wire transfers
Checks written for personal expenditures
Counterfeit checks
Stolen checks
Staff too chummy with banking personnel
Beware of QuickBooks
Common Fraud Schemes:
Operating & Trust Bank Accounts
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False write downs and write offs
Kickbacks from vendors (client costs advanced)
Unauthorized use of the house charge accounts
Check is written for personal use and posted as something else to the client account
Holding trust money with no documented purpose
Common Fraud Schemes:
Costs Advanced, Accounts Receivable, Fees, and Trust Receipts
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Kickbacks from vendors (operating expenses)
False or inflated vendor invoices
Office purchases on personal credit cards
Excess purchase schemes
Duplicate payment schemes
Common Fraud Schemes:
Accounts Payable, Purchases, & Trust Expenditures
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Ghost Employee
Special projects employee
Overpayment Schemes, overpaying hours
Double payment of Payroll to an Employee
Diverting withholding from payroll checks
Expense report fraud
“Working through lunch”
Common Fraud Schemes:
Payroll & Benefits
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Segregation of Duties
Read General Ledger entries
Budget vs. Actual Comparisons
Watch Fixed Assets and watch for assets that were “expensed.”
Regularly Rotate Duties and Cross-Train
Inventory control
Standard supply inventory and ordering control
Key Control Policies & Procedures
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• Know Your People
• Watch for lack of vacations
• Extravagant Lifestyles
• Open the Bank Statements and review cancelled checks
• Depreciation schedules are NOT inventories
What to Watch For
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Questions?
LOMAS has answers
The Florida Bar’sLaw Office Management Assistance Service
(LOMAS)
www.floridabar.org/lomas
PMA Email:
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