Paul W. Carlson, CPA (00:00):
Hi, this is Paul Carlson CPA with Law Firm Velocity. Weget two very difficult questions from law firms that bill based on flat fees,that most of our firms are in states where prepaid flat fees can be depositedto the operating account and reported as revenue in the month of the depositthat the prepaid flat fees do not have to be deposited into IOLTA. And thataccount leads to a couple of counting puzzles. So first is if a firm willaccept a 5,000 prepaid flat fee for an estate plan, that in the back of theirmind, the owners know that they owe services to clients, but they really don'thave a dollar amount on the amount of work that they owe to other people. Sothey're often asking, "Well, how do I know how much work that I owe to myclients based on these flat fees in my operating account? I want some sort ofgauge to know how we're doing on basically clearing the backlog or deliveringthe promised services to their clients."
(01:05):
And then second, as their firms grow, the owners want toknow how much do we collect per each timekeeper, that most practice managementsystems, when you put in a flat fee, that you would say that you have matters,$5,000 is a flat fee, and you assign a matter owner. And the full $5,000 fee isallocated to usually the lead attorney. Well, what's happened within thematters is that the attorney will do $3,000 of the work. The paralegal will get2000. So the attorney's collections are overstated and all of the paralegalsand support staff have zero collections. And we really don't know how everyoneis doing. And then additional wrinkle is that we will track the amount of timethat timekeepers will put against a matter, and that usually does not tie tothe flat fee charged.
(02:01):
And we need some way to true up instances where the actualtime that went into the matter exceeds or is less than the flat fee paid chargeto the client. So what we're doing is we're using a general retainer process totrick practice management system into giving us these reports. So generalretainer background is some states allow law firms to deposit prepaidprepayments for hourly work directly into their operating account. And whatthat does is that really mirrors what our flat fee firms are doing that puttheir flat fees into operating. So let's jump over to practice managementsystem and walk through a couple examples, that we're going to do three steps.So one is we're going to record the client payment as a general retainer andthen look at the associated reports. We're going to enter some time entries andlook at the reports. And then we're going to bill out the matter and look atreports.
(03:00):
Okay. And so here we are within the practice managementsystem. And all we've done here is we created the matter with the matter name,and we've posted the general retainer that we received from the client. So thisis the matter set up. If we look at a report of general retainers, we can seethe report that says that we have a $5,000 general retainer on hand with theclient. So we can track that detail. All right. And so here, we look at thefirm income statement and we can show that the $5,000 prepaid flat fee isshowing up as earned revenue for the month. And let's look at the collectionsreport.
(03:45):
And so here, we show no bill or activity on the matter,that there's been no work completed. So we expect that there's no billedamounts, no collected amounts. This unbilled is for other transactions that arein my sample file. So the next step is to post time into the matter. All right,and here's our time entry for our $4,000 worth of paralegal work. And here'sour time entry for the $3,000 worth of attorney services on the matter. Allright, so let's walk through our reports again. So here, we have the mattersummary, that we have the general retainer of $5,000. We have fees into thematter of 7,000, that are example we're going to go 2000 over and then fix it.Update our general retainer balances. So here, we can see that we have our$5,000 general retainer on the matter and that we have $7,000 of unbilledcharges or $7,000 worth of WIP on the matter. Our accounting report, that byposting time is not an accounting entry under modified cash basis accounting.And so all we're still reporting is our $5,000 general retainer.
(05:05):
And here, we're looking at our collections report. And sohere, we show that we have the $4,000 of paralegal time as billable and the$3,000 worth of attorney time as billable, that we're going to learn as thesebillable and billed numbers can't be trusted much. That what we need to do isfocus on the collected number. And again, sample transaction has somethingstrange in here for negative $500. So what we walk through is we've shown howwe can see that there's time against the matter. So the final step is to goahead and bill the matter and apply the fees to the general retainer. So we aregoing to invoice the matter, and this is where we know that we're over. And atthis point, I would suggest that the firm owner or the attorney responsible forthe matter would sit down and look at the settings to see why did we go $2,000over on the matter? And so from our spreadsheet, we know that the paralegal wasover by $2,000 on their time. So we're going to change that time entry andwe're going to say we can only bill 20 hours.
(06:34):
So what we're doing is we're basically posting awrite-off, that we put 40 hours in, we're going to say we can only bill 20. Andso now our work in progress matches the flat fee. So we're going to save andapprove the invoice. All right, so let's walk through our reports again. Sohere we're back at the matter summary. Now, our general retainer balance hasdropped to zero. We've received a 5,000 payment. We can see that our fees havedropped to the $5,000 that we wrote off the $2,000 overage. Update our generalretainer balance report. And so that matter has now cleared out, that we haveno general retainer and we have no WIP accounting. We still show our $5,000worth of income. And here's what we've been waiting for. We're looking forcollected numbers.
(07:30):
Here, we can see that the attorney collected $3,000 on thematter and that the paralegal collected $2,000 on the matter. And this is whatwe're really looking for, is truthful or accurate. Collected numbers actuallytie back to the flat fees actually collected from each of the timekeepers, thatthere is a lag, that these collected numbers don't post until the matter isactually completed and billed. But even with that lag, we're starting to getnumbers that are meaningful. And if you're watching the details closely, I ranthat invoice for the wrong date. And so everything posted in October 19th,which is why we had to change this date a bit. And the year dates are justbased on other examples. And with that, we've walked through how we can use thegeneral retainer process within ActionStep to monitor real collected numbers bytimekeeper, and how we can use general retainers and work in progress numbersto track how much general unearned, general retainer we have on matters, andhow much unbilled work we have on flat fee matters. Thanks. Bye-bye.
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