Paul W. Carlson, CPA (00:02):
Hi, this is Paul Carlson, CPA with Law Firm Velocity. In working with firms that bill with flat fees, one of the key management pieces that they've always been missing is some form of collections by timekeeper. And so we have an example on the screen here. So we have associate GR who had collected fees of $4,650 and Paul Carlson has collected fees of $350 that firms want these types of numbers to manage production. And they will also use these types of numbers for bonuses.
So just kind of walk through how we got these numbers and some of the logic we're using. So one is, this is payments received. So we're only going to measure... Or that I think the only number that there's any truth is, once the matter is completed and we've applied the prepayment to the matter when the case is concluded. That if we try to look at any sort of production before the matter is completed and you really have no idea if anyone's going to have to put a lot more time into that matter or exactly how it's going to shake out.
So a workflow here is client might hire us in January and give us a $5,000 advance. We'll do work in February and March, and then the case might be completed in June. That we would not get these numbers or they would not be reported into the system until the case was completely closed and we allocated all the money received to individual timekeepers, and at that point we would have this report.
So on one hand, using this process gives us an objective number that we know we got $5,000 for the case and we know exactly which timekeepers receive credit for that $5,000. The downside is it takes a while to get to these numbers. But just anything else is going to be such a compromise that people are going to play games on us.
So let's walk through how we did this within Soluno. So jumping into a murky accounting concept is some states... An example in New York will allow firms that collect prepayments for time to actually deposit those funds into the firm operating account that it's called... Usually we see it's called a general retainer. But other states when they have a prepaid flat fee, they can go ahead and also deposit that money straight into their operating account. So we're going to use the software tools concept of the general retainer to kind of trick the system into giving us the reports that we need.
So first payment we received is $5,000 flat fee for the case. And all we do with this is we record it as a deposit to the operating account for $5,000 and we assign the $5,000 to a case. So at this point when we run reports, we can see that this $5,000 is allocated to this case. When we run financial statements, the $5,000 appears in the operating account and it also appears as a negative asset.
So part of our accounting service is, we would use an entry to move the $5,000 negative asset off the balance sheet and move that over onto the income statement that under tax rules, if you put the money in the operating account is taxable income in the month received. That is just a small workaround working within the system that's more a little bit geared... Is trying to do accrual accounting for this process. So we have the payment received.
And then we have two time entries into this matter. So one, we have one hour at $350 by timekeeper PC. And then we have another entry of 25 hours at $350. If you break out your calculator, you know that that should actually be $8,750. That when this time entry initially went into the case, it was for the full $8,750. And so if you would've ran a WIP report before we did the count closeout, it would show that there's the $8,750 in WIP for this charge and then the 350 in time for this charge.
So what we're doing is we're just trying to capture the amount of time that went into the matter as the matter is being completed. Once we get to the point where the matter is being closed and we're complete, we create an invoice for the matter. Now the client's not going to get this invoice, this is just for our internal record keeping. And in that billing process, you would need to determine exactly how the $5,000 is going to be allocated by timekeeper. So in this case, I determined that I did a fantastic job, so I should get the full $350 credit for my work. That timekeeper GR that they blew their budget. And so they're the ones who should take a haircut on the collected fees.
So in the invoicing process, you can change the dollar amounts for time entries. And so that's why I did a force change the dollar amount. That note, we do keep the total hours intact. So you could use this report to... We're maintaining the actual amount of time that was used for the matter in some for future skew analysis. And so this is where we tie the actual time that went into the matter to how we're going to allocate the fees.
For some firms this could be quite the puzzle and it could lead to a good amount of tension. But thinking about it, if someone's way over budget that that would be a great conversation for the following week's management meeting that we would do these closeouts every week. Someone is way over budget. We discuss it at the next team meeting. That was it something specific to the case that we need to reconsider the sales process? Was it something that we have our skews wrong, so we're pricing this type of work incorrectly? Or do we have a new associate who needs additional training to understand how this process works?
And so from there, that we save this. And when we create the invoice that the software automatically uses, that general retainer to pay off the invoice or balance due on the invoice is zero. So if we go back... And so here we have our history on the case that we've billed $5,000. We have 5,000 in receipts, we have zero accounts receivable and zero in trust. And so this would work in that we could run this report for multiple matters. And we could get clean monthly collections numbers that we could tie back to financial statements. And with that, it's an overview of how we see one path for getting timekeeper realization numbers for flat fee cases. Thanks.