Law Times

Page 10 February 5, 2018 • Law Times www.lawtimesnews.com Ensuring adequate cash flow is critical Firms should examine their realization rates BY MARG. BRUINEMAN For Law Times I n moving from partner to principal of Fireman Daya & Co., Jasmine Daya wanted to be able to better gauge the fi- nancial health of the firm. The task included examining current approaches and intro- ducing new ones. In addition to the regular monthly statements, she em- ploys a spreadsheet that pro- vides her with a picture of the firm's numbers. "I can't stress enough the importance of a very healthy, fi- nancially sound firm," she says, pointing to the many obliga- tions of running a firm, includ- ing paying staff. "If I'm worrying about how am I going to fund my staff, how am I going to fund the disburse- ments on my file, then how am I able to focus on providing prop- er quality service to my clients as a lawyer?" As a personal injury lawyer in Toronto, Daya might have to carry a file for two to five years, with upfront costs, before seeing payment. So ensuring there is adequate cash f low is crucial. The need to stay on top of the fiscal side of a legal business has firms of all sizes and prac- tice areas looking beyond the traditional hourly billing rate to judge the firm's success and key- ing in on numbers that can offer them insight quickly. Figuring out the realization rate and comparing that month to month provides a clear and quick view on how well the firm is performing and whether there ought to be any adjustments, says Mark Dormer, president of Cosgrove Associates Inc. in To- ronto, which advises law firms on profitability. "It can affect a law firm's profitability and it could help a law firm look at any inefficien- cies and adapt faster to the low rates," says Dormer. "We think they're very im- portant metrics for law firms and a lot of law firms don't re- ally look at this as closely as we would like." The realization rate mea- sures the percentage of the posted hourly billing rate that is actually paid by the client, with the discounts and write-offs subtracted. Any realization rate below 80 per cent demands some an- alyzation to determine what can be improved, says Dormer, although many firms shoot for a rate of 90 per cent or higher. The rate ref lects the firm's revenue, and a small change can have a big impact on its profit. "We try to find ways to im- prove them. For example, if the lawyer has a low realization rate on a client or a file, is there a way that we can automate the work to help with the realization rate? Should we be raising our prices?" says Dormer. "Sometimes, there's not too much we can do about it, be- cause we have to remain com- petitive. But at least you have that information and you can act on it." In its 2018 Report on the State of the Legal Market, Georgetown Law and Thomson Reuters Legal Executive Insti- tute reported that "dynamic" law firms in the United States offered fewer discounts on stan- dard rates to win business and they engaged in fewer pre-bill write-downs, suggesting they had better upfront communica- tions about their pricing with their clients. While law firms have intro- duced modest rate increases since 2008, there has been push- back from clients, resulting in a somewhat downward or f lat realization over the past decade, the report notes. The result is that firms need to maximize on their existing billings. While determining the re- alization is effective for projec- tions of revenues and cash f low, it is also a ref lection of the firm's ability to maximize profit on the work already being done. "If my associates are all re- sulting at 85%, that means . . . there is a 15% difference be- tween what I have them set up to bill and what they actually bill at," says Stephen Mabey, the Nova Scotia-based principal of Applied Strategies Inc., which advises law firms. By determining the rate, the firm can explore the reasons behind that 15-per-cent differ- ence and perhaps expose larger problems. It may be that the firm's rates are too high or it might simply be an issue related to just one as- sociate or practice area. Or it may well be that part- ners are having a difficult time putting together a total bill on a particular file and have decided to write down the associates' time. Whatever the issues, he says, the realization rate provides the starting point to examining the firm's operations and heading off any problems that may be developing. The key is to focus on the bottom line and how to bring more money into the firm with- out necessarily having to put in more work, simply by focusing on collecting for the work that is already being done. "I think realization is critical, because if you tell me your rates are $500 an hour, but if you are really only billing out at $400 and collecting $375, there's an issue here some place. FOCUS Jasmine Daya says it is crucial for lawyers to run a 'financially sound' firm. See Use, page 12 18th Annual TLA Awards Reception © 2017 Thomson Reuters Canada Limited 00238SJ-88292-NP The Honourable Justice John I. Laskin will be honoured with the Toronto Lawyers Association Award of Distinction. Ian Hull will be honoured with the Honsberger Award. 18th Annual TLA Awards Reception Thursday, March 8, 2018 OMNI KING EDWARD HOTEL Vanity Fair Ballroom 37 King Street East, Toronto Reception at 6:00 p.m. Presentation to follow at 7:00 p.m. Hors d'oeuvres and food stations. Business attire is requested. tlaonline.ca/event/2018Awards Untitled-1 1 2018-01-16 9:06 AM

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