We’ve seen it happen many times, real estate attorneys whose excellent track record in a court of law isn’t enough to offset financial woes caused by poor practice management.
“There’s a tendency to focus only on the outcome of each legal transaction,” says Ann Irons, a CPA who offers financial services to real estate lawyers in Bellingham, MA.
“Simple metrics like the number of cases won may be gratifying, but they don’t offer any useful insight,” she adds. When used correctly, metrics can improve all aspects of your practice, including its profitability, attorneys’ performance, and use of resources.
Value of Work in Progress
Your firm’s investment in its clients and cases can be viewed in terms of work in progress, or WIP. WIP should be recorded as a paid billing in a timely manner, otherwise the investment can be considered less valuable. Remember, the more time that elapses without billing for WIP, the more likely it is that you will not collect the full amount billed. Although you can use any length of time as a guideline, 180 days is standard.Work in progress past 180 days / Total work in progress
If the percentage of cases in progress over 180 days continues to increase, this may indicate that one of your attorneys is not operating as efficiently as needed, or that not all cases are being billed correctly, if at all.Ratio of Total Debt to Net Fixed Assets
Sometimes you have to spend a little to earn a little, which explains why some debt is acceptable. Two conditions must be met. First, your borrowing must be used to fund the growth of your firm; it must be productive. Second, how quickly are you able to repay these debts? If you cannot do so in a timely manner, you could easily become trapped in a vicious cycle of ever-growing debt.
Monitoring the total debt and fixed assets of your firm is particularly useful in measuring the long-term dependence on debt and identifying potential consequences of doing so.
Rate of Realization
Most law firms will have some amount of bad debt. The rate of realization measures the portion of revenues collected for services billed. Suppose you’ve billed a client $1,000, but you’ve been paid only $900 for a realization rate of 90 percent. Ninety percent is a reasonable expectation for realization rate. Anything less suggests the need for improvement in the way your firm handles its client intake and selection.
For example, could your intake questionnaire be reworked to provide more insight into a client’s willingness and ability to pay? How diligent is your practice in its accounts receivable collections?
Expectations for Billable Time
If your practice employs several real estate lawyers, each should be given a goal for billable hours. This information is critical in analyzing how profitable your firm, and it also helps you create a realistic budget for upcoming months and years. Breaking this number down into a daily goal allows you to quickly identify and address possible shortfalls.
To calculate your daily billable hours expectations, begin with your annual billable goal. Let’s use $300,000 and assume that you bill $200 an hour.
To determine your goal, use the formula below:
Annual billable goal / number of work days in a typical year = Daily billable goal Daily billable goal / hourly billable rate $300,000 / 231 = $1,298/day $1,298 / $200 = 6.5 expected billable hours
Effective Hourly Rate
An attorney’s effective hourly rate shows how efficiently time is used to generate revenue from fees. This number also proves useful when compared to your expected billable hours. Law firms also use this number to measure performance among multiple attorneys or employees.
Calculate the EHR using this formula: Fees collected on a case / number of hours invested in the case.
These are only a selection of key metrics related to financial performance. In future posts, we’ll cover important metrics for measuring human resources performance, marketing performance, and spending.
Are you a real estate attorney in need of accounting services? To learn more about our accounting and bookkeeping services, or to schedule a meeting with Ann Irons, CPA, contact us at 508-966-0700. We welcome individuals, businesses, and law firms located in Bellingham, Boston, Medway, Woonsocket, and the surrounding areas.,
Ann spent over 25 years in the financial service industry, gaining knowledge and experience that allows her to provide an array of tax, bookkeeping, and accounting services for her clients. Relying on a stringent code of ethics and a dedication to maintaining the highest industry standards, Ann works hard to ensure her clients receive the quality service they’ve come to expect. A member of AICPA and MSCPA, Ann has also had an article featured in the renowned publication, Banker and Tradesman. 
