Small Firm Tips for Saving Money

by Terri Olson

Have you seen the Dilbert comic strip where Wally gives the manager employee input? Cynically, he suggests using #4 instead of #2 pencils to save money, because he believes that only inconsequential and useless suggestions are ever adopted by management. Sad to say, many law firms, when they try to cut costs, adopt these same penny-wise but pound-foolish techniques, ignoring things that could really cut the bottom line in the long run. Everybody wants to save money, so here is a laundry list of things that really make a difference to the small law firm. Some of these are obvious -- the trick is making yourself do them -- while others you may not have thought of.

Collecting outstanding bills (accounts receivable) will have a greater impact on your bottom line than almost all attempts at expense reduction. Forget finding a new paper supplier or a cheaper secretary; pursue your accounts receivable first. Consider this: if you bill $130,000 a year and collect 85%, which is not uncommon, you've received $110,500. If you can nudge this 85% to 90%, you've made an extra $5500 without doing any more legal work at all.

Keep time records. Studies have shown that attorneys who keep detailed time records recover 50-100% "lost time" over those who guess or try to reconstruct their time from their desk calendars. Make the experiment: for one month, force yourself to record everything you do and meticulously post what can be billed to clients. At the end of the month, compare what you've billed with previous months. If you're like the vast majority of lawyers out there, you'll be very pleasantly surprised at the difference. P.S. Contingency-based attorneys aren't exempt from this. How will you know if your fee is a good one unless you know how much time it took you to produce the result? A $15,000 fee for a matter that took 100 hours of your time is a much better result than a $15,000 fee for a matter that took 200.

Understand tax regulations -- learn your allowable deductions and your reporting requirements. Don't let a fear of the tax man prevent you from taking what you are legitimately entitled to. And don't count on your accountant to figure things out for you. He or she may not understand what goes on in a law firm enough to translate your terminology into accountingese. And remember that an accountant's main function is to properly account for what is already there: although he or she may make some good suggestions about minimizing expenses or maximizing profitability in the future, your accountant isn't there to plan your future. That is up to you.

Keep good records! This goes hand in hand with the above. How can you take a deduction if your recordkeeping is so poor that you can't sort your office rent payment from the check you wrote to the cat-sitter? Many sole practitioners start out by having one checkbook for both personal and business expenses, reasoning that it's all coming from the same source and going to the same place eventually. This is a sure way to lose money, so keep meticulous records and make sure that your personal and business records are always separate, no matter how little money your law practice makes.

Increase retainer size -- especially if your turnover ratio is poor. What all this means essentially is "stop floating loans for your clients." If your retainer is exhausted and you send out a bill, it may be 60 days before you receive payment from the client. Consider that you've done the work anywhere from one to four weeks before the bill is printed and delivered, and you will realize that the time period between when you work and when you're paid can be as much as three months, even for what you consider good clients. During that three months, the client has received interest-free legal work. Why operate like that? When a retainer begins to get low, ask the client to replenish so that there's always a positive retainer balance.

Don't permit yourself to continue working for clients who haven't paid. Do we really need to go over why this is bad business? Yet many lawyers persist in believing that people who have made no attempt to pay, or have lied about their ability to pay, or have prevaricated about when they're going to pay, are going to suddenly turn into good clients. They aren't, and what is worse, they will refer more people just like them to you.

Deposit checks immediately. If you have an interest-bearing checking account, get those deposits inside as fast as your feet can carry you. With interest rates at their current level, you won't get rich quickly this way, but over the long term, the interest will add up.

Prepare a budget. Would you ever tell a secretary that her pay should be whatever is left over after expenses are paid? Many sole practitioners pay their own salaries that way, instead of budgeting a minimum salary level and then paying themselves an annual or quarterly bonus if revenue is higher than anticipated. What's worse, they don't have a sense of whether the expenses are where they should be, because they haven't budgeted either desired income or anticipated expenses.

Use separate credit cards for business and personal use (interest on cards used in business should be deductible). If you're forced to put a big-ticket item for your office on a credit card, at least don't swallow the interest and annual fees.

If you charge expenses back to your clients, be thorough and accurate. Attach copy monitoring cards to your copier, and use them. (Many will produce an electronic report that you can dump directly into your billing system.) Consider using a long distance service that will let you enter a client code and send you a monthly report of calls by client. Usually, asking employees to manually log calls or manually review fax printouts and telephone bills doesn't work terribly well, since it's a substantial drain on the time of already busy people. If you can, try to automate this process; you will get far more accurate results.

Let your staff share the wealth from expense reduction. If you encourage your staff to watch paper costs, not waste electricity, control supplies, etc., you may or may not get results. But what if you said instead, "Here are our current supply costs. If we can reduce them, you'll get 25% of what we saved." That way, you save money; your staff makes money; everybody's happy. Try it!