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BEYOND FULL-TIME LEADERSHIP: MODERN LAW FIRMS NAVIGATE FINANCIAL COMPLEXITY WITH FRACTIONAL CFO SERVICES

As law firms grapple with the complexities of a globalized economy and an ever-changing regulatory landscape, the demand for strategic financial leadership has never been higher. Traditional full-time CFO roles are evolving, and in their place, fractional CFO services are rising to prominence. Today’s modern law firms are leveraging these services to achieve agility, efficiency, and strategic advantage.

The Landscape of Fractional CFO Services

From specialized financial firms to independent consultants, the market for fractional CFO services is broad and diverse. The trend is gaining momentum as law firms recognize the value and flexibility it brings.

Fractional CFO services equip law firms with the seasoned financial leadership that may otherwise be beyond their reach, offering it on a part-time or temporary basis rather than a full-time commitment. Many firms find themselves in a position where their size or budget does not warrant the full-time salary of a veteran financial manager. Consequently, this often leads to an inexperienced staff member being saddled with critical financial responsibilities, despite lacking the essential training and expertise vital to the firm’s success. The fractional CFO model provides a strategic solution to this challenge. By engaging an experienced financial leader on a fractional basis, the firm gains access to the CFO’s extensive knowledge and skills without incurring the substantial costs associated with a full-time salary and benefits package. This approach unites the profound financial insights of a seasoned executive with the flexibility to respond to evolving business needs, delivering a balanced and highly effective financial management strategy.

Drivers of Fractional CFO Adoption

In an increasingly complex legal landscape, law firms require strategic financial planning and oversight to succeed. The fractional CFO fills a crucial role, aligning financial strategies with legal objectives, overseeing budgeting and forecasting, and providing insightful analysis. Whether navigating a merger, restructuring, or simply looking to optimize financial performance, the fractional CFO can offer tailored support.

Fractional CFOs often bring industry-specific knowledge that can guide law firms through unique challenges and opportunities, ensuring that financial strategies align with legal objectives. For growing or transitional firms, a fractional CFO provides adaptability, allowing the firm to scale financial leadership as needed.

What Services & Benefits Can A Firm Expect?

The scope of services offered by a fractional CFO may vary based on a law firm’s specific needs. Common services include:

• Strategic Financial Planning: Working closely with firm leadership to define and implement long-term financial goals.
• Cash Flow Management: Monitoring and optimizing cash flow to support firm operations and growth.
• Budgeting and Forecasting: Developing realistic and flexible budgets and forecasts to guide decision-making.
• Financial Reporting and Analysis: Providing clear, actionable insights through regular financial reports and analysis.

In addition, the use of fractional CFO services provides several unique advantages to law firms, including:

Agility:

• Adaptation to Change: Fractional CFOs allow law firms to quickly adapt to changing financial landscapes, whether those are market shifts, regulatory updates, or internal transitions.

• Tailored Expertise: Engaging a fractional CFO allows for a customized fit to the firm’s unique needs and strategic direction at any given time.

• Flexibility: With the ability to scale their engagement up or down, fractional CFOs provide law firms the agility to respond to new opportunities or challenges without the constraints of a full-time position.

Efficiency:

• Cost Savings: By using a fractional CFO, law firms can access high-level financial expertise without the full-time salary burden, making it a cost-effective solution.

• Optimized Financial Operations: Fractional CFOs often conduct in-depth financial analysis, streamlining processes and identifying areas where efficiency can be improved. This can lead to more robust financial management without unnecessary complexity or overhead.

• Technology Integration: Many fractional CFOs are adept at leveraging the latest financial technologies and tools, which can lead to significant efficiencies in financial reporting, budgeting, and other essential functions.

Strategic Advantage:

• Strategic Alignment: Fractional CFOs work closely with law firm leadership to ensure that financial strategies align with the firm’s broader business goals, creating a cohesive approach that supports long-term success.

• Specialized Industry Knowledge: Many fractional CFOs offer industry-specific expertise, understanding the unique financial challenges and opportunities within the legal field.

Challenges & Considerations in Adopting Fractional CFO Services

Selecting the right fractional CFO requires careful consideration of the firm’s goals, the specific expertise needed, and the desired level of engagement. Clear communication, alignment with firm values, and a well-defined scope of work are essential to a successful partnership.

Ensuring seamless collaboration between a fractional CFO and the firm’s existing financial team requires clear communication and defined roles. As with any successful relationship, open and honest communication is key.

Handling sensitive financial information necessitates robust security protocols. Trust and transparency must be established from the outset.

What Does This Mean For Your Firm?

In an ever-evolving legal landscape marked by complexity, competition, and regulatory intricacy, law firms must be nimble and strategic in their approach to financial management. The traditional full-time CFO model may no longer offer the flexibility and specialized expertise required to navigate these challenges. Enter the fractional CFO, a transformative solution that has redefined financial leadership within the legal sector.

Partnering with a fractional CFO offers not just a financial advantage but a strategic one. From aligning financial goals with the broader vision of the firm to optimizing cash flow, mitigating risks, and leveraging opportunities for growth, the fractional CFO becomes a vital partner in shaping the firm’s future.

The agility that comes with this model allows law firms to respond to changes in the market or internal transitions with finesse and foresight. It provides the freedom to scale financial expertise up or down as circumstances dictate, ensuring that the right level of guidance is available exactly when and where it’s needed.

Perhaps most compellingly, the fractional CFO brings a level of specialization and industry insight that can be a game-changer for law firms. They offer not just technical skills but strategic thinking, aligning financial planning with the unique dynamics of the legal industry. This depth of understanding can translate into innovative strategies, competitive advantages, and a more robust bottom line.

In summary, the utilization of fractional CFO services represents a modern, flexible, and intelligent approach to financial management in law firms. It’s a model that recognizes the unique demands of today’s legal practice and responds with a solution that is both practical and visionary. In leveraging the expertise of a fractional CFO, law firms are not merely adapting to change; they are positioning themselves at the forefront of a new era of legal financial leadership, poised for success in a complex world. The fractional CFO is not just a service; it’s a strategic partnership, offering law firms the keys to unlock their full financial potential.

 

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Building A Better Budget

What does your cashflow look like this year? How about your net income by year end? Having a quality budget in place removes the guesswork and fear from your financial picture and ensures you end up where you want to go. We have all heard the phrase, “Failing to plan means planning to fail.” A budget will not only help to forecast net income and cashflow, but it will help you to plan for potential problems before they become emergencies.

The two most common types of budgets are zero-based and incremental. If you are a new firm with little to no history, you will need to start with a zero-based budget. A zero-based budget is just what it sounds like – you start at zero and forecast each expense you anticipate incurring, as well as revenue you hope to achieve.

With incremental budgeting, you have the luxury of looking back at your history and creating the next year’s budget based on what you have experienced before. Be careful though – with incremental budgeting, it can be easy to fall back on past numbers with little effort made to improve efficiencies and drill down on ways you can do better.

Regardless of the approach you take, the first step is to ensure you have a good general ledger chart of accounts. If you are not familiar with the chart of accounts, it is simply a list of income and expense categories used to track your spending. In a law firm, typically your income is fee income. You may also have rental income if you own a building and rent a portion of it to other tenants. When it comes to expenses, you want to find the happy medium between having enough detail to aid you in future years without having so much detail that it is a cumbersome system to use. It is also helpful to ensure you keep any expenses pertaining to meals separate – your CPA will need to know that number at tax time, because your meals are not 100% deductible!

Steps to Creating Your Budget

Don’t Plan In A Vacuum

Start by reaching out to all stakeholders in your firm. What do their CLE expenses look like for the year? Any conferences planned? How is the equipment looking? Is anyone going to need any major purchases to replace outdated equipment? What about staffing? If leadership is planning to add more employees to the firm, you need to know whether you are going to have the money to cashflow that addition. Attorneys typically take six months before they show a profit for the firm.

It is helpful to use a spreadsheet for planning your budget. You should have a sheet for income, a sheet for expenses, and a sheet that links the bottom line of your total income and expenses so that you can see your forecast net income.

Estimate Income

Begin your budget by estimating income. In your budget spreadsheet, you can estimate the fee income for each timekeeper in your firm. It is a simple list for each timekeeper, with their estimated billable hours for the year multiplied by their average realization rate. Your financial software may be able to run this realization report for you – if it does not, you can estimate a fairly accurate number by looking at the timekeeper’s previous history and dividing their fee receipts by their billable hours. If your firm has any contingency matters, don’t forget to account for them as well – some may be at a stage where there is guaranteed income to the firm, and some may still be truly contingencies – you should account for the contingencies in a separate line item that is not counted on.

Use Your GL Accounts To Your Advantage

When it comes to budgeting for your expenses, be sure you have a good plan for your GL accounts before you start. Try to anticipate everything you may want to be able to track in the future. Your financial software should allow you to have parent accounts and sub-accounts.

For example, you may have a set budget for firm events for the year, but you may want to be able to track what the firm spends on the annual holiday party v. its summer outing and its annual Administrative Professionals’ Day celebration. You can have a parent account for firm events, with sub-accounts for each of those sub-items. This will allow you to easily plan in future years by having a quick picture of your historical spending.

Another great way to use sub-accounts is to track costs the firm incurs for each attorney. Examples include insurance, association dues, CLEs, conferences attended, etc. By creating a sub-account for each attorney, it is very easy to run a report from your financial system to track their direct costs when you want to determine their true profitability for the firm.

Budget Your Months Accurately

When it comes to entering your budget into your financial system, be sure you are entering the expenses in the month that you expect them to occur. Some items will be spread equally throughout the year, like rent and equipment leases. Others will occur in specific months, like professional liability renewals and holiday parties. By planning for your professional liability renewal to occur in the appropriate month, you can have your eye on the ball in cashflow planning and avoid the extra expense of paying for financing your premium.

Don’t Just “Set It and Forget It”

Use your budget for decision making. If someone is requesting something that was not planned in the budget, is it necessary? Is it something that can wait until next year? If not, is there a way you can make up for the added expense by changing your spending in some other areas or increasing firm revenue?

Once you have entered your budget into your system, make sure you monitor it regularly. You should be running a monthly YTD income v. budget report to track how you are doing against your budget. Don’t despair if you see variances v. your budget. No budget is perfect, but by having one in place and monitoring it regularly, you can prevent any big surprises and make contingency planning when necessary.

For more information on budgeting, check out our Finance Level 2 Course, which includes a lesson in budgeting and a downloadable spreadsheet you can use in your own practice.

 

 

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Exploring Legal Software Solutions

Today’s consumer is more discerning than ever, and that includes the clients we see in our law firms. With the technology revolution and the explosion of information that is available on the internet, clients no longer come to firms ready to follow their attorney’s advice and pay their fees without question. In order to keep up with the technological savvy and demands of their clients, law firms continue to work to meet the challenges they face in handling their growing firms as efficiently as possible. With a business unlike any other, firms continue to strive to find the best software to support their unique needs.

In a recent survey, managers of 51 law firms responded to share their solutions to time & billing, finance, and document management software.  While the software solutions they are currently working with meet their needs to a certain extent, the survey responses confirm that firms have yet to find an all in one software that they are satisfied will meet the needs of their firm. It seems we are all going to be making do as best we can with what we have until someone comes up with a better solution.

Common complaints with current software options include:

  • Lack of mobility/remote access
  • Poor reporting/report layouts
  • Poor or no integration with other law firm software
  • Lack of customization ability

It is my hope that this survey will help to shed some light on the pros and cons of the most common software currently being used in the industry so that the reader can make an educated decision in choosing the option that best suits their needs.  Based on current communication among current law firm managers throughout the country, Centerbase combined with NetDocuments seems to be the current preferred option for mobility and integration. Stay tuned for a future article with more information on these options.

Click here for the full survey report.

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Ten Ways to Improve Billable Hours

Capturing the billable hour is a challenge in every law firm, but with a few habits and procedures in place, coupled with today’s technology, it doesn’t have to be so bad. Gone are the days where an attorney had to hand write every task on a time sheet and give it to his or her assistant to manually enter into the billing system. Today, attorneys and paralegals can easily enter their own time into the firm’s billing system to streamline the billing process and enable the timekeepers and their firm to capture a better and more accurate portion of the work they are performing.

Create a Policy

If your policy and goals are not defined, they will not be met.

It is important that you have support from leadership and that leadership leads by example.

Concurrent Timekeeping

Concurrent = Accurate = Client Trust

Studies show time not kept concurrently results in a 30% loss of time.

One hour lost per day at $350/hour results in $91,000 lost annually, per attorney.

Use a User Friendly Time & Billing Program

iTimekeep, for example, syncs with more than 30 popular time and billing platforms – it allows attorneys to dictate their time through an app on their phone or Apple watch when they are out of the office.

Shift Annual Reporting to November – October

If you start the annual reporting period in November, timekeepers may start their annual billing cycle in the hole during the holiday months, but that’s okay. This will encourage them to focus on catching up early in the year, in January and February, when firms need productivity the most.

This also allows timekeepers to do catch-up in September and October if they are behind their annual goal at year-end, instead of struggling to catch up during heavy holiday months. They will thank you for this!

Give Your Attorneys a Billing Calculator

A billing calculator helps attorneys track their year-to-date hours v. goal. This helps them to be a participant in tracking their time and having accountability for meeting their annual goal.

This prevents any misunderstandings or confusion – everyone stays on the same page as to where the attorney’s YTD balance is.

Require All Time To Be Entered By the End of the Day

Anything missing should be caught up and in the system by the end of the week at the latest.

Firm Manager Should Provide Month-To-Date Reports to Each Timekeeper Each Monday Morning

By providing timekeepers with a calendar view of their hours, they can quickly see a snapshot of any time they may be missing.

Capture All Time, Including Non-Billable

Task codes for non-billable tasks such as business development, internal meetings, training of other personnel allow you to track how your timekeepers are using their time when not performing billable tasks and keeps them in the habit of tracking everything they are doing. This also allows them to see where their time is going so that they do not become discouraged.

Use Your Billing System’s Timer

Using the automatic timer keeps your time spent on a task calculated automatically and allows you to pause the timer during interruptions.

Always Track Time for Flat Fee and Contingency Matters

You may need this for fee petitions.

Tracking your time on these matters is important, as it is the only way you can accurately analyze profitability on certain types of cases.

To learn more about creating your firm’s billing protocols, check out our Law Firm Finance Level 1 Course.

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Law Firm Profitability Increased Through Cost Accounting? You Bet!

How are changes in today’s climate impacting your law firm profitability? I have seen a lot of changes in the legal industry since 1982.  Technology has changed our world significantly, and law firms are slowly catching up to the rest of the business world in many areas.  Gone are the days of the large offices, where every attorney has their own secretary, and the firm houses a large library full of books that must be manually updated with those supplements that would arrive on a regular basis, much to our chagrin.

As we have slowly joined the rest of the world in the ways of online research and paperless offices, we are also considering more appropriate ways to look at profitability.  This is due, in part, to client demand.  Clients no longer accept the idea that they will pay our firms by billable hour, with no budget or foreshadowing of what their final out-of-pocket expense may become.  Technology allows for broader communication and stiffer competition, and if we want to remain competitive, we must become more efficient and readily able to consider alternative fee arrangements (AFAs) such as flat fees, risk collar agreements, etc., or at the very least, offer accurate budgets that clients can count on so that they know their worst-case scenario.

While we may have given in to the fact that we must agree to these terms in order to get the work, many firms find themselves no longer profitable as a result.  Where they are falling short is in the failure to recognize that, like other businesses, they must have a cost accounting model that allows them to understand what their cost is for producing the client’s product before they can agree to a sale price.

What can we do?

If you think only manufacturing companies can use cost accounting methods in their businesses, think again.  Law firms who are using these methodologies will leave in the dust those who do not jump on the bandwagon.  You may not be producing widgets, but you are selling a “product” that can measured in order to determine the cost to produce.  By implementing a cost accounting system, you will be able to determine profitability by producer, department, office, client and matter.  (You may be surprised to learn that your largest fee income client is not necessarily the largest contributor to your bottom line!)

How does a firm determine the cost of their product?  It isn’t as complicated as you may think.  By determining the direct costs of your timekeepers (salary, payroll taxes, insurance, training, etc.) and allocating the remaining firm overhead to your timekeepers (how the overhead is allocated to differing timekeepers is another article in itself), you can determine an annual cost per timekeeper.  By then looking at the number of hours each timekeeper bills per year, you can determine their hourly cost.  (Timekeeper annual cost including overhead allocation ÷ number of hours billed = timekeeper cost per hour.)

The calculations are done. Now what?

Once you have determined the timekeeper’s cost per hour, you can readily understand what you can (and cannot) afford to offer as your billable rates and AFAs.  You can determine the necessary billable rate for each timekeeper in order to meet your profitability goals, taking into account anticipated write-downs and write-offs (typically 10 percent).  You will also know very quickly whether you can afford to offer a client a discount on any given invoice and still receive a profit on that work.

By doing a small amount of legwork on the front end to create a model that works for your firm, you can

  • Ensure you are billing your timekeepers at a rate that will meet your law firm’s profitability goals;
  • Look at the profitability of each client based on the timekeepers who have worked on their matter(s) and the effective rates for those timekeepers after receipts;
  • Be more accurate in your budgeting for client proposals;
  • Be more competitive by using this knowledge to be creative in your billing models and the use of AFAs.

Get started

You can start with a simple spreadsheet prepared for each of your timekeepers to determine their break even rate. Email me at suzette@lawpracticeedge.com for a free copy. To learn more about cost accounting in law firms, check out our Finance Level 2 course.

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