While there are many financial metrics that require constant monitoring in a law practice, only two tell you if you are actually earning what you think you earn:
Collections Realization Rate: the percentage of fees billed that you collect.
Billing Realization Rate: the percentage of time worked that actually gets billed to a client.
Unless you collect 100% of what you bill, you aren’t earning what your rate would indicate. If you aren’t getting paid 100% of the value of time worked, you aren’t earning what you think you earn. This applies to practitioners who charge flat fees, bill hourly, or use contingent fees.
Collections Realization Rate
The goal for your collections realization rate is 90% or higher. If you are below this minimum level, here are some ways you can improve this rate:
- Request an adequate advance fee deposit every time (at a minimum, take an amount equal to your estimated first two months of fees)
- Get better at case/client selection
- Learn to say “no” when there are red flags in the initial consultation
- Help your clients set realistic expectations of the cost and possible outcome of their matter
- Make sure your written fee agreement details your expectations of payment, as well as what will happen if payment isn’t received timely
- Bill timely, with value-demonstrated billing descriptions
- Fire bad clients
- Develop a collections policy that goes into effect immediately when an account first becomes past-due
Billing Realization Rate
If your billing realization rate is not at 100%, then you must look at these factors:
- Timekeeping habits: do you capture time contemporaneously?
- Discounts and write-offs: ask yourself, “Why am I doing this? Did my client request a discount?”
- WIP (too much unbilled time on the books)
- Ineffective delegation to, or supervision of, others, which results in you having to redo their work without billing for it
- Poor work ethic
Why are realization rates so important?
You cannot effectively manage your practice if you aren’t dealing with the reality of your business. You need to know what you are actually earning to prepare a budget, and to calculate an appropriate billing rate. Most importantly, you need and deserve to be paid for the work you do for your clients. If you aren’t getting paid appropriately, the solution is in your hands.
Learn More at the Solo and Small Firm Conference — July 18–20
Learn more about effective billing and many other topics at the WSBA’s 8th Annual Solo and Small Firm Conference, July 18–20. Register online now to attend! For more information on law firm metrics read Minding Your Own Business: The Solo and Small Firm Lawyer’s Guide to a Profitable Practice (ABA 2010), by Ann M. Guinn.
The Solo and Small Practice Section helps solo and small practice attorneys to ethically conduct a profitable, satisfying business by acting as a clearinghouse for qualified law practice management and technology information.