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.