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THINKING'LIKE'AN'ACCOUNTANTFinancial'Statement'Fundamentals'for'Law'Firms
Adrian'Pape,'Clio'Kaitlin'Graves,'Clio
SUBJECT: ACCOUNTINGYou came!!! Thanks.
Who are we?Adrian Pape - Senior Accountant
Kaitlin Graves - Accounts Payable Specialist
Repeat...we work at Clio.
Who are you?1. Attorneys2. Accountants3. Attorneys doing accounting
AttorneysWhat do I do with these financial statements?
AccountantsShould I be offering more advice?
Attorney-Accountants1. We’re impressed.2. Are you tired yet?
Today’s Topics• 7 Trust Accounting Survival Skills• Financial Statements Demystified• The Meaning of Metrics
Caveat...Always remember to consult with an accounting professional and your BarAssociation for best practices when making financial decisions for your firm.
...ACCOUNTING...
Learn by doing?
Take a course??
Google???
Let’s start with the statements.
Graves & Pape, Attorneys at Law
7 TRUST ACCOUNTINGSURVIVAL SKILLS
They’re in the conference app!
1. KEEP CLIENT BALANCES SEPARATE
They can be pooled, but you need to maintain individual records
2. YOU CAN’T SPEND WHAT YOU DON’T HAVE
Don’t use client funds to pay firm expenses
3. THERE’S NO SUCH THING AS A NEGATIVE BALANCE
Before you incur further expenses on an account,you need to request additional advances
4. TIMING IS EVERYTHINGPrepare for delays between advances and expenses,
especially when dealing with checks
5. YOU CAN’T PLAY THE GAME UNLESS YOU KNOW THE SCOREClient trust fund balances need to be monitored on a regular basis
6. THE FINAL SCOREIS ALWAYS ZERO
When the case is closed, all funds are either earned or returned
7. ALWAYS MAINTAINAN AUDIT TRAIL
You need to have the appropriate documentationin place to support the trust balance
7 Trust Accounting Survival Skills1. Keep Client Balances Separate2. You Can’t Spend What You Don’t Have3. There’s No Such Thing as a Negative Balance4. Timing is Everything5. You Can’t Play the Game Unless You Know the Score6. The Final Score is Always Zero7. Always Maintain an Audit Trail
Check your Clio Cloud Conference App!
FINANCIAL STATEMENTS DEMYSTIFIED
LET’S SIMPLIFY THEM FIRST...
• Revenue• Expenses
• Assets• Liabilities • Equity
Five Types of Accounts
What is Revenue?
What are Expenses?
Rent, marketing, salaries, client costs, etc.
What is an Asset?
A beautiful vacation house on the beach!
What is a Liability?
The mortgage on that house!
What is Equity?
Partner contributions and draws + net profit (revenue – expenses)
ACCOUNTING = BALANCE
Journal Entries
All journal entries must be in balance and are made of up of a group of Debits and Credits.
DR – Cash $100
DR – Accounts Receivable $900
CR – Revenue $1,000
Trial Balance
All debits and credits in a double-entry accounting system.Always in balance.
Always in balance!
Assets
Liabilities
Equity(Rev-Exp)
The Golden Rule - Expanded
= +
• Balance Sheet• Income Statement (or Profit and Loss)
• Cash Flow Statement
• Owners Equity
Financial Statements
Summarizes a company’s assets, liabilities shareholders’ equity at a specific point in time.
Balance Sheets
Income StatementMeasure of the financial performance of a company over a period of time.
The Financial Statements• Balance Sheet• Income Statement (or Profit and Loss)
• Cash Flow Statement
• Owners Equity
The Financial Statements• Balance Sheet• Income Statement (or Profit and Loss)• Cash Flow Statement
• Owners Equity
Graves & Pape, Attorneys at LawEmployment Law – We’re Experts!
WHAT DO THESE FINANCIAL STATEMENTS TELL US ABOUT
OUR BUSINESS?
THE MEANING OF METRICSHow the numbers can help...
REVENUE
CONSIDER TRACKING BY PRACTICE AREA
REVENUE VS.
ACCOUNTS RECEIVABLE
High level of Accounts Receivable1) Issues with collection?2) Issues with how we bill?
ALTERNATIVE BILLING
CLIENTBILLING =
FIRM= PROFITVALUE
Types of FeesHourly• easy to track
Capped• displays efficiency
Blended• depends on type of work
Types of FeesPerformance Based Fees
• qualitative or quantitative
Contingency - NEW!• win / win• must be reasonable AND competitive
Types of FeesFlat Fees
• no cost uncertainty
Value• assess the outcomes
Time• limits risk of unforeseen items
Types of Fees• Hourly• Performance-Based• Flat Fees
! Hybrid!
BUT HOW DO I CHOOSE?Check your margins
Immigration Example (we’re experts!)
Charging $150 / hrAverage of 40 hours/case billed ($6000)5 customers per year
Not hitting targets…...need more customers!
Immigration Example (we’re experts!)
Needs to cover…adminsalaryprofitbilling rate
Billing Rates - Simplified
Needs to cover…adminsalaryprofitbilling rate
Billing Rates - Simplified
$50 (x2000 = $100,000 per year)
Needs to cover…1/3 admin1/3 salary1/3 profit3/3 billing rate
Billing Rates - Simplified
$50 $50$50$150
Needs to cover…1/3 admin1/3 salary1/3 profit3/3 billing rate
Billing Rates - Simplified
$50 $50$50$150
costcostnot a cost$100 cost
Types of costsFixed costs• cannot be adjusted
Variable costs• change with volume / activity
Fixed costs $750 court fees$ 50 filing fee$800 total fixed costs
Immigration Example
Variable costs $100 photocopying45 hours x $100/hour cost = $4500$4600 total variable costs
Immigration Example
Fixed costs = $800Variable costs = $4600Total expenses = $5400Revenue = ($150/hr x 40 hrs) $6000
$6000 - $5400 = $600 margin
Immigration Example - Margin
$150/hour…...is that still appropriate?...is that still competitive?…is the client happy?
Immigration Example
Variable costs – effeciencies! ...using Clio!...mobile app!...document automation!…intake forms!
Immigration Example
45 hours only 41 hours since streamlining
$100 photocopying41 hours x $100/hour cost = $4100$4200 total variable costs (saved $400!)
Immigration Example
Fixed costs = $800Variable costs = $4200Total expenses = $5000Revenue = ($150/hr x 40 hrs) $6000
$6000 - $5400 = $1000 margin
Immigration Example - Updated Margin
$1000 margin......change to flat rate?...more clients?…hourly = 5 clients/yr $5,000
…flat rate = 8 clients/yr? $8,000…drop and be more competitive?
Immigration Example
CLIENTBILLING =
FIRM= PROFITVALUE
• competitive rate• low risk
• economies of scale• balance of clients
BACK TO OUR HIGH ACCOUNTS RECEIVABLE BALANCE...
FAST COLLECTION
How long do we wait for money?Accounts Receivable Turnover =
Total Revenue
Average Accounts Receivable Balance
How long do we wait for money?Accounts Receivable Turnover =
Total Revenue
Average [(Closing A/R) , (Opening A/R)]
How long do we wait for money?Accounts Receivable Turnover =
18,000
Average [(Closing A/R) , (Opening A/R)]
How long do we wait for money?Accounts Receivable Turnover =
18,000
Average [(50,000) , (Opening A/R)]
How long do we wait for money?Accounts Receivable Turnover =
18,000
Average [(50,000) , (58,000)]
How long do we wait for money?Accounts Receivable Turnover =
18,000
54,000
How long do we wait for money?Accounts Receivable Turnover =
18,000/54,000 = 0.333
30 days / 0.333 = 90 daysNOT GOOD.
Collect Faster Using Clio!• Quickbills ! one-stop billing!• Clio Payments ! linked to emails!• Payment Profiles ! incentivize!• Payment Plans ! add to calendar!• Trust Payments ! remember 7 T&Ts!• Fundbox ! $25K in 1 day!
SMART EXPENSES
Period Comparison• Month over month• Quarter over quarter• Year over Year
• Look for trends in the data or anything unusual jumping out
Expense CashflowAccounts Payable Ratio =
Total Invoiced Expenses
Average Accounts Payable Balance
Expense CashflowAccounts Payable Ratio =
Total Invoiced Expenses
Average [(Closing A/P) , (Opening A/P)]
Expense CashflowAccounts Payable Ratio =
4,575
Average [(Closing A/P) , (Opening A/P)]
Expense CashflowAccounts Payable Ratio =
4,575
Average [(1,500) , (Opening A/P)]
Expense CashflowAccounts Payable Ratio =
4,575
Average [(1,500) , (2,500)]
Expense CashflowAccounts Payable Ratio =
4,575
2,000
Expense CashflowAccounts Payable Turnover =
$4,575 / 2,000 = 2.29 30 days / 2.29 = 13 days
NOT GOOD.
WHAT ABOUT COST OF SALES?
Budgeting ! NEW Matter Budgets!• Create budget• Track hours and expenses• Review progress • Make changes
Recovering Client Expenses• Expense Recovery
Recovering Client Expenses• Expense Recovery• Flat Rate
- General & Administrative Fee
Recovering Client Expenses• Expense Recovery• Flat Rate
- General & Administrative Fee• One-time Charge
NOW THAT WE HAVE MONEY…
HOW WELL ARE WE SPENDING OUR TIME?
REALIZATION RATE
Revenue = Realization Rate2 lawyers$150 per hour160 hours per month75% efficiency (marketing, meetings)$36,000 target revenue
vs $18,000 = 50%
What does this mean?1. Wrong billing structure?2. Not enough clients?3. Not spending our time wisely?
Time to Hire?10 hours spent billing$150 per hour$1500 lost revenue
$25/hour bookkeeper8 hours saved (@$150 - $25)“$1000” additional profit/margin per week
Cost of an Employee$1000 per week…
…laptop…training…benefits
…still probably time to start searching…
So much to do, so little time!
Graves & Pape, Attorneys at Law
Graves & Pape, Attorneys at Law• 7 Trust Accounting Survival Skills – balanced!• Financial Statements – demysitifed • The Meaning of Metrics
• Gross Margin – adjusted billing rates• A/R & A/P Turnover – improved cash flow• Expense Recovery – higher margins, improved workflow• Realization Rate – time to hire!
THINKING LIKE AN ACCOUNTANTFinancial Fundamentals for the Small Law Firm
Thinking Like an Account Take-aways• Trust Accounting 7 Survival Skills • Alternative Billing Whitepaper• Financial Statements Demystified• Increasing Income• Managing Cashflows• Decreasing Expenses
QUESTIONS?
Thank You.