Question:
We have a 12-lawyer business litigation firm in Chicago. We have eight partners in the firm and we are managed by a three-member management committee that was just formed this year. I am a member of the committee and I am responsible for the general financial oversight of the firm. I am trying to get a handle on law firm financial metrics and especially what are the financial warning signs that I should be aware. If you have an outline or list that you would be willing to share we would appreciate it.
Response:
Here is a short list of what I call financial red flags that you might find helpful:
- Expenses increasing at a greater rate than revenue
- Revenue per partner decline
- Revenue per lawyer decline
- Partner earnings decline
- Overhead per lawyer increasing at greater rate than cost of living
- Billing realization < 95% (current environment 85%)
- Collection realization < 97% (current environment 87%)
- Total realization vs standard < 82% and total realization vs standard > 95%
- Accounts receivable over 180 days > 25%
- Unbilled time over 180 days > 15%
- Contingent fee hours worked > 8-10% of total client hours recorded (Non Contingency Firms)
- Occupancy costs > 10% of fees collected
- Debt > tax basis value of fixed assets (borrowing to pay partners)
- Line of credit borrowing not “cleaned up” for 90 consecutive days
- Debt > partner contributed capital
- Debt > ½ of total inventory (fees only)
- Payouts to retired partners > 8% of net income
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John W. Olmstead, MBA, Ph.D, CMC
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