If you are making strategic decisions do you have sufficient financial information to make those decisions? It seems that calculating the expense of time may have gone out of fashion. Some may never have calculated it. But how do you know if a transaction is profitable? And how, if you are quoting for work, do you know if your pricing is right?
The expense of time (time recording) is often dismissed by conveyancers and some other work types because the price is fixed. This demonstrates a clear misunderstanding of the cost of doing the work. It may also be that market conditions or court rates dictate the price. But this does not mean that you are totally tied and have to accept the work. It may also demonstrate that fee-earners do not know the difference between the expense rate and the charge out rate. How do you know what the margin is and if the work is worth doing?
That said I have encountered the view: ‘But I just want to know the charge out rate.’ In some firms, the charge out rate decision is made by reference to what the competition is charging. This is subject to misinformation problems, but in any case is hardly good financial management and would be difficult to justify under rule 5. Was that all there was to their strategy? Having calculated the expense rate, that is, the cost of doing the work, only then can you calculate the desired margin and this the charge out rate.
Coming out of recession, it is essential to get the price of services right as more businesses go bust post recession that surviving through it. Why? Well probably one reason is that in order to get work in prices are held to remain competitive putting a strain on cashflow and the overdraft. It is the recovery of cash not profit that causes the problem. Only when you have a desirable margin, and the fees are paid, will you have sufficient cash. It sounds obvious doesn’t it!
I never cease to be amazed how many lawyers do not know the difference between cash and profit but accept that financial training is still not given the merit it deserves. In fact the question is not on their radar. I believe that calculating the expense of time is fundamental to this understanding but the link is rarely made, in this context.
In many law practices there will be computer software which records time. But this is used ineffectively for many reasons. Perhaps the main reason is under recording time or not recording time at all. Looking at its use and understanding the link between the charge out rate, the expense rate, and in the end cash received will help post recession profitability and survival.
Mike Gorick is associate director of The Compliance People Ltd.
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