There are at least two types of realization that comes to play in the financial management of a law firm. In this context we are speaking of Billing Realization and Collection Realization. Both of these represent potential ‘leaks’ in the financial boat of the firm if the firm is not properly attentive to these numbers.
Billing realization is the percentage of recorded lawyer or paralegal time that actually ends up on the bill sent to the client. For example, if $1,000 worth of time is recorded on the time sheet, but is whittled down and billed out for $900, the billing realization rate is 90%, meaning that the firm has billed out only ninety cents of each dollar of time recorded as having been worked. That 10% loss represents one financial leak.
To prevent that leak (and others) from sinking the financial boat, it is important for the firm to monitor not just the aggregate dollars written off as billing adjustments, but to additionally monitor the billing realization percentage.
If possible and if available in your jurisdiction, compare the firm’s billing realization to benchmark numbers in surveys. Try to reach or exceed the realization in the surveys. This is one area which can yield tremendous additional profit for the firm without individual members having to work harder, simply by tightening up billing practices. The gold standard is typically 95%. Anything less than 90% should be looked at carefully.
Have someone designated in the firm as the ‘billing czar’ whose job it is to monitor billings. Most lawyers are at first put off by the thought of someone else, like a billing committee member or “billing czar,” reviewing and changing the final content of a client’s bill. But it is always advisable to have another lawyer – the “billing czar” as it were – make the billing lawyer accountable for discounts given beyond a modest limit everyone agrees to in advance.
Once that bill is in the hands of the client, then your collection realization comes in focus.
Your collection realization rate is the percentage of your billed fees which is actually collected. Collection realization rates are often overstated because lawyers tend to leave uncollectible receivables on the books for extended periods of time, sometimes years, rather than admit that those receivables will never be collected. The Oracle of Delphi said to be true to yourself..and keeping receivables on the books that you don’t have a ghost of collecting is not helping you or the firm.
To determine how the firm is doing, the firm has to acknowledge that there are only a few possible outcomes once a bill is sent: 1) collection; 2) partial collection with the balance written off; or 3) total write off.
According to statistics from the Commercial Law League, receivables in excess of 1 year have only a 28.4% chance of being collected. Receivables in excess of 2 years have only a 12.5% chance of being collected.
Evaluate your receivables using these statistics to calculate the likelihood of bad debt, and then compare what you have collected and what remains as collectible in your receivables against what you billed. Also compare these numbers to benchmark data. This is another area which can yield tremendous additional profit for the firm, without putting in longer hours, simply by tightening up or implementing good receivable management practices.
Realizing the potential information that your realization rates could produce for you should be motivation enough to start monitoring and tracking these numbers today!
–David J. Bilinsky
“The views expressed herein are those of the writer and should not be inferred as those of the Law Society of British Columbia.”