Chapter 8 Billing and Financial Management This class
Chapter 8 Billing and Financial Management This class will discuss the billing process and how law firms manage their finances to be profitable. We will also discuss the realization and budgeting processes. Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 1
Four Elements of the Billing Process • Communication • Documentation • Regular and Frequent Billing • Descriptive Bills Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 2
Communication • Most important aspect of the billing process • A client should have a clear understanding of fees • Should be discussed at the initial interview Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 3
Documentation • Soon after the client interview, an engagement letter is sent to the client along with copy of the fee agreement. • All discussions of a bill must be documented by a memo to the file as soon as possible. • All transactions are documented on a client ledger sheet. Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 4
Billing Should Be Regular and Frequent • Monthly billing is the most common method of billing. • Clients prefer smaller monthly bills. • A client’s perception of the value of legal services diminishes with time. Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 5
Descriptive Bills • All bills should describe the services rendered in a brief and concise manner. • Bills in flat-fee cases need not be as descriptive as those in hourly cases. Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 6
The Billing Process • A preliminary bill is prepared. • A lawyer reviews the preliminary bill and may add charges to or subtract charges from it. • The eight factors considered to determine the reasonableness of a fee are represented by the acronym TOCATPET. Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 7
The Billing Process (…cont’d) • To make adjustments to bills, many firms use a fee adjustment memorandum • Interest may be charged on past-due accounts • Lawyers often extend credit to clients Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 8
Billing Styles The style of the bill depends on: • Type of client • Type of case • Firm policy Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 9
E-Billing • Today, law firms use computerized billing systems • Billing systems are often combined with timekeeping systems • Requires extensive coding • There are separate software packages for small firms and large firms Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 10
Four Common Unethical Billing Practices • • Applying a client’s funds to a disputed fee Charging more than a client agreed to pay Charging for services not rendered to a client Increasing a flat fee without the client’s consent Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 11
Common Billing Problems • • Vague descriptions Surprise total Perceived poor work Nickel-and-dime billing Team churning Interoffice conferences Errors in arithmetic Other glaring errors • • Bill received late Sent to wrong person Padding Clerical work Review and revision Block billing Time/task appropriateness • Multiple timekeepers Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 12
Nonbillable Administrative Charges • Training • Time spent by lawyer to “get up to speed” when file is reassigned within firm • Calendaring • Conflict checking • Check court dockets • File opening review, organization, or closing • Indexing and organizing • Copying and filing • Office supplies and storage charges • Overtime charges • Markups on miscellaneous charges • Scheduling meetings Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 13
Client-Directed Billing Policies • Many large corporate legal departments and insurance companies have developed their own billing policies for their outside law firms to follow • These policies direct the law firms how to prepare their bills and inform them of unacceptable billing entries Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 14
Profitability Factors • Direct – R ates – U tilization – L everage – E xpenses – S peed • Indirect – S trategy – C ulture – O rganization – R eward systems – E Environment Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 15
Two Types of Expenses Compensation • Associates and paralegals • Administrative staff • Employee benefits Operating • Occupancy costs • Office operating costs • Professional activities • General business Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 16
The Realization Process = Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. © Cengage Learning 2014 The realization process is turning time into cash. 8. 17
Realization Rate Percentage of amount billed that the firm actually receives for the work done. Hourly Rate × Percentage of Uncollectible Accounts = Realization Rate $150 × 90% = $135 per hour Billable Hours × Realization Rate = Income 1500 × $135 = $202, 500 per year Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 18
The Budgeting Process • A budget is prepared at the start of each year. • The budget projects income and estimates expenses for the year. • Studies show that firms that adhere to a budget are more profitable than those that do not. Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 19
Calculating Gross Income J. Smith, Esq. J. Jones, Esq. A. Andrews, Esq. T. Turner, Esq. C. Coty, Esq. L. Yates, LA P. Bunnell, LA L. Tunstill, LA Billable Hours Hourly Rate 1600 1800 1900 1800 $250. 00 200. 00 175. 00 100. 00 75. 00 50. 00 Realization 90% 90 85 80 80 85 80 75 Total Projected Gross Income Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. Total $360, 000 306, 000 266, 000 153, 000 108, 000 67, 500 $1, 886, 500 © Cengage Learning 2014 Timekeeper 8. 20
Calculating Expense Percentage Expense Income = Expense Percentage $1, 048, 575 $1, 886, 600 = 56% Expenses are estimated based on last year’s expenses. Anticipated increases are factored into the total projected expenses. Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 21
The End Please turn to the discussion questions in your text. Copyright © 2014 Delmar Cengage Learning. All Rights Reserved. 8. 22
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