A Financial Magic Cauldron?

“When shall we three meet again
In thunder, lightening, or in rain?
When the hurlyburly’s done,
When the battle’s lost and won.
That will be ere the set of sun.”
The three witches from Act 1, Scene 1 of Shakespeare’s Macbeth

If there were a bubbling cauldron or crystal ball that could reveal your firm’s future financial health, would you take a look? Actually, there is. But very few law firms bother to make the time needed to read the tea leaves and gaze into the future.

If you consistently and accurately log your time, your work in progress report is like an oracle, allowing you to take information in your financial system and turn it into a reasonably accurate prediction of what your cash flow situation will be like in the weeks to come. Since today’s WIP turns into tomorrow’s billed time, keeping a regular eye on it lets you know what your potential income in the coming months may (or won’t) be, plus gives you the information needed to better regulate your case intake process, accepting more marginal cases when WIP is low and being more discriminating when it is high. Not all WIP is created equal, however, and you need to look carefully into the swirling fog of the smoking cauldron to correctly divine the messages from the financial world.

Decreasing WIP does not bode well. Increasing WIP, on the other hand, is usually a good thing, but you also need to know why it’s increasing. For example, time being logged on contingency files for cases that have been carefully screened and will likely pay big dividends in the future is something you’d like to see, but WIP that is increasing due to firm lawyers’ failure to bill regularly can predict big, big future problems when it comes to collection. Unlike some other things (wine comes to mind), WIP does not benefit from ageing. The longer after delivery work is billed, the harder it will be to collect.

Divide you WIP over 180 days old by your total WIP. The results should be between 20 and 40 percent. If it’s over 40%, it’s time to get some bill out, and find out why they weren’t sent out sooner. If your financial software can’t give you this information, don’t seek out your nearest fortune teller. Go shopping, instead, for a good accounting package – one that allows you to better monitor your financial health. After all, you don’t want to find out only after the hurlyburly’s done, whether the battle’s lost or won.