Paul W. Carlson, CPA (00:00):
When we provide CFO services for hourly based firms, one of the first things we turn on is a weekly billable dollar report. So an example is on our screen and from this we can see the dollar value of each timekeeper's entries for every week. And from that we can identify which timekeepers are on track for meeting their goals, and we can also see if the firm's overall revenue goals are on track for making that monthly budget. When we create the income statement, we actually report revenue by timekeeper, so we can again confirm collections by timekeeper to make sure everyone is on path. What happens with our flat fee firms is this process just falls apart because of the way a lot of the matters are run within some of the billing systems. That what we see happen with hourly firms is they will create the matter and then they go ahead and that initial prepayment is immediately applied to that flat fee time entry.
(01:08):
And so what that does is the entire collected fee is allocated to the responsible attorney on the matter, and all subsequent time entries on that matter must be marked as non-billable. So what this does is one, collections is broken, that we will never know the exact collections by timekeeper because the collections are given to whoever the responsible attorney is on the case, and that collections number is the most accurate number we can have, and so we lose that. And then marking all these time entries as non-billable, it just doesn't give us a clean report. So a process we are working through is to begin to run flat fee cases using the same process that you would for an hourly matter. And I actually have to thank a Texas family law firm for making this obvious for me that in Texas, prepaid flat fees must go to trust.
(02:12):
And so they gave me the first initial steps on this. So the workflow we're looking at for that firm is that when we have the matter, we go ahead and create the matter in case management tool. We do not create the invoice for the matter upfront. The invoice for the flat fee is either generated as a Word document or some other template. It doesn't come out of the case management system because we cannot make the invoice upfront. The prepaid flat fee is deposited to IOLTA if that's what's required in your state. Some firms, you can choose to keep flat fees in trust until they are fully earned, that you don't have to do the earned upon receipt trick.
(03:00):
And if you have a more advanced case management system like Saluno or ActionStep, there's actually a concept that some states allow prepaid fees to be kept in the firm operating account and then you bill out against them later. As the work is completed, timekeepers enter time entries as they normally would, and then when the work is complete, we create a bill. The only trick here is the amount that's spent, the amount of time entries that went into the case, is never going to tie to the actual fee collected, so we have to do a forced entry to make them tie and we will see that in a minute. And what that does, what this process does is when we run a billable dollar report for February when the work is completed, we will see the value of the work completed. And when the case is closed and the fees are collected, we actually get accurate collections numbers by timekeeper.
(04:02):
So enough theory. Let's jump over into Clio and see what this looks like. All right. And so here we have our matter in Clio. And so we have this $2,000 case and the associate attorney went over budget by $500. So the weekly billable dollar report is going to be overstated by that $500 overage, but we'll talk about that in a second. But we're putting in time entries just like an hourly case, and so we're running those management reports. At the end of the case, we would post an adjusting entry to decrease what associate attorney A went over on their budget. And so this way, we're forcing the time sheet entries to match the actual fee on the case. And in doing that, so here we just have an example invoice, that this invoice does not go to the clients, that this invoice is used only internally within the firm.
(05:03):
And on that tie out entry, that we actually can type in the dollar values for future analysis, that we can say that we spent $2,500 on the case even though it was a $2,000 prepayment, and that way if we get enough of this data, we can go back and look at the process we used for these cases to determine if we need to change processes or we're under charging. And then for a revenue report, here we have, this is partner A. It shows that they collected $500 and for associate attorney A, collected $1,500. So you can run dozens of cases and as long as you use this process, the collected numbers or the collected values by case are going to be correct. So let's go back to that spreadsheet with some of the details on it. So one of the concerns we'll hear about this process is that billable dollar report is inaccurate.
(06:06):
And that is true because we're going to look at the value of time entries every week to see if people are on track. That billable dollars is always usually overstated and it's a dirty number, but it's the best predictor we have of is the team on course this week to make our financial goals? And so hourly firms have the same issue, that they have write-offs and write-downs and payment problems where they also don't collect the total value of their time sheet entries. And then the other is creating the invoice at the end where we have to make that adjustment that if there's 50 time sheet entries in here, this can take too much time. And so to alleviate some of that pressure, one idea we're working with is if the spent value on the case is plus or minus 10% of the fee collected, just go ahead and make this adjusting entry and let's just charge it to the firm partner. If we're within 10%, we're not even going to do an analysis to see what the issue was.
(07:15):
If we are more than 10% off, it's important to take the time to understand what happened here so the firm can learn and improve processes. All right, let's jump back to that spreadsheet. So again, just an overview of how a firm could potentially run flat fee cases and maintain usable billable dollar reports and receive accurate collections reports. All right, thanks.
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