Profit Planning and Cost Accounting for Law Firms

Transcription

1 Profit Planning and Cost Accounting for Law Firms Presented by Samuel J. Catanese, CPA FM31 5/5/2018 8:15 AM The handout(s) and presentation(s) attached are copyright and trademark protected and provided for individual use only.

2 Profit Planning and Cost Accounting for Law Firms Presented by: Samuel Catanese, CPA May About Us Presenter: Catanese Group Samuel J. Catanese, CPA 307 State Street Johnstown, PA Phone: Fax: One Gateway Center 420 Fort Duquense Blvd Suite 1850 Pittsburgh, PA Phone: Fax:

3 About Us - Credentials In less than a year, we have had a 350% increase in profits thanks to the new profit planning and measurement system we put in place. N August 19, Samuel Catanese Catanese Group 3 Introduction Organizations and Managers are almost always interested in and concerned about costs. 4 2

4 Introduction Knowledge of the cost of products or services is indispensable for making management decisions. 5 Introduction Knowledge of the cost of products or services is indispensable for: Understanding your firm s strengths and weaknesses Making management decisions Adjusting fees and billing rates Increasing profitability 6 3

5 Understanding Costs How are a firm s costs calculated? 7 Calculating Costs Relationship of Costs to Volume When a company changes the amount of product or service it provides to customers or clients, their total costs will change as well. More product produced = Higher costs 8 4

6 Understanding Costs In order to understand how costs are calculated, we first need to understand these two concepts: 1. Variable costs 2. Fixed Costs 9 Understanding Costs Variable costs are costs that change in direct proportion with volume produced. 10 5

7 Understanding Costs Variable costs Units Produced 5,000 10,000 Selling Price $20 $20 Cost to Produce a Unit Profit Per Unit $ 2 $ 2 Total Sales $100,000 $200,000 Total Cost 90, ,000 Total Profit $ 10,000 $ 20, Understanding Costs Fixed Costs are costs that do not vary at all with volume produced. 12 6

8 Understanding Costs Fixed costs Rent $50,000 $50,000 Units Produced 5,000 10,000 Rent Per Unit Produced $ 10 $ 5 Cost to Produce a Unit 8 8 Total Cost Per Unit $ 18 $ 13 Selling Price $ 20 $ 20 Total Cost Per Unit Profit Per Unit $ 2 $ 7 Total Sales $100,000 $200,000 Total Cost 90, ,000 Total Profit $ 10,000 $ 70, Understanding Costs The true secret to a successful cost accounting system is to convert all costs to variable costs associated with each unit of product. 14 7

9 Product Analysis What is our Product? Billable Hours 15 Product Analysis In order to calculate the cost to produce this product, we must understand these two components: 1. Overhead 2. Direct Costs 16 8

10 Product Analysis Direct costs are all costs directly related to the Producer. Examples of direct costs include: Salary/wages Insurance costs (health, vision, etc.) Taxes (payroll) Employee expenses (continuing education, travel, etc.) 17 Calculating Costs How Do We Calculate the Cost of Overhead? Utilizing financial statements, we extract all expenses that include direct costs to the Producers and use all other expenses as overhead. Total Expenses Direct Costs = Overhead 18 9

11 Calculating Costs What Are Our Objectives? By using cost accounting we: Set guidelines for write-offs Set Billing Rates Measure Profitability by: o o o o Producer Client Division Office Location 19 Establishing a Profit Plan What does this all mean? Where do we start? 20 10

12 Establishing a Profit Plan Start with a Profit Plan Establish company-wide effective rates and cost rates 21 Establishing a Profit Plan Set guidelines for billing practices Establish proper billing rates for each individual in the company Establish proper cost structures for each individual within the company 22 11

13 Questions? Samuel J. Catanese, CPA (814) Christine S. Scholl, MBA (814) Lisa A. Hurst (814)

14 Your opinion matters! Please take a moment now to complete the evaluation. Thank You!

15 EXERCISE #1: A SIMPLE PROFIT PLAN Profit Plan for 2017 Income 10,800,000 Direct Labor and Expenses 9,000,000 Overhead 1,000,000 Profit 800,000 EXERCISE #1 - Calculation of Hourly Rates Billable Hours 100,000 FTE'S 100 Effective Rate Per Hour $ Direct Labor and Expenses Per Hour Overhead Per Hour Total Cost Per Hour $ Profit Per Hour 8.00

16 A PROFIT PLAN USING EFFECTIVE RATES AND BILLABLE HOURS EXERCISE #2 Billable Hours 100,000 Standard Billable Rate $ Value of Time Worked 12,000,000 Write Downs of WIP 10% (1,200,000) Billed Amount 10,800,000 Effective Rate $ Direct Labor 6,500,000 Direct Expenses 2,500,000 Overhead 1,000,000 Total Cost 10,000,000 Billed Amount 10,800,000 Total Cost 10,000,000 Profit 800,000 Profit Per Billable Hour 8.00

17 EXERCISE #4: Establishing the Effective Rate for the Firm to Achieve the Profit Goal of $25/Hour. BILLING RATES GOAL EVEN RATE Billable Hours 100,000 Billable Hours 100, , ,000 Standard Billable Rate $ Billing "A" Rate Value of Time Worked 12,000,000 Value of Time Worked 13,888,889 11,111,111 Write Downs of WIP (1,200,000) Write Downs of WIP 10% (1,388,889) (13.89) (1,111,111) Billed Amount 10,800,000 Billed Amount 12,500,000 10,000,000 Effective Rate $ Effective Rate Direct Labor 6,500,000 Direct Labor 6,500, ,500,000 Direct Expenses 2,500,000 Direct Expenses 2,500, ,500,000 Overhead 1,000,000 Overhead 1,000, ,000,000 Total Cost 10,000,000 Total Cost 10,000, ,000,000 Break Even Rate Billed Amount 10,800,000 Billed Amount 12,500,000 10,000,000 Total Cost 10,000,000 Total Cost 10,000,000 10,000,000 Profit 800,000 Contribution 2,500,000 0 Profit Per Billable Hour Goal Per Billable Hour Goal Direct Labor Per Billable Hour Calculated Rate Direct Expenses Per Billable Hour Write Downs 10% (13.89) Overhead Total Cost Total Cost Per Billable Hour Billing Rate Effective Rate $ Total Cost Per Billable Hour $ Profit Per Billable Hour $ 8.00 Goal Per Billable Hour $ 25.00

18 A PROFIT PLAN USING EFFECTIVE RATES AND BILLABLE HOURS EXERCISE #6 ESTABLISHING THE EFFECTIVE RATE FOR THE FIRM TO ACHIEVE THE PROFIT GOAL OF $25/HOUR. BREAK BILLING RATES GOAL EVEN RATE Billable Hours 100, , ,000 Billable Hours 120, , ,000 Standard Billable Rate $ $ $ Billing "A" Rate Value of Time Worked 12,000,000 13,200,000 14,400,000 Value of Time Worked 14,444,444 10,000,000 Write Downs of WIP 10% (1,200,000) (1,320,000) (1,440,000) Write Downs of WIP 10% (1,444,444) (12.04) (1,000,000) Billed Amount 10,800,000 11,880,000 12,960,000 Billed Amount 13,000,000 9,000,000 Effective Rate $ $ $ Effective Rate Direct Labor 6,500,000 6,500,000 6,500,000 Direct Labor 6,500, ,500,000 Direct Expenses 2,500,000 2,500,000 2,500,000 Direct Expenses 2,500, ,500,000 Overhead 1,000,000 1,000,000 1,000,000 Overhead 1,000, ,000,000 Total Cost 10,000,000 10,000,000 10,000,000 Total Cost 10,000, ,000,000 Break Even Rate Billed Amount 10,800,000 11,880,000 12,960,000 Billed Amount 13,000,000 9,000,000 Total Cost 10,000,000 10,000,000 10,000,000 Total Cost 10,000,000 10,000,000 Profit 800,000 1,880,000 2,960,000 Contribution 3,000,000 (1,000,000) Profit Per Billable Hour 8.00 $ (8) Goal Per Billable Hour Goal Direct Labor Per Billable Hour $ Calculated Rate Direct Expenses Per Billable Hour $ Write Downs 10% (12.04) Overhead Per Billable Hour $ Total Cost Total Cost Per Billable Hour Billing Rate Effective Rate $ Total Cost Per Billable Hour $ Profit Per Billable Hour 8.00 $ Goal Per Billable Hour Profit 800,000 1,880,000 2,960,000 Income Per 53, , ,333

19 A Profit Plan Using Effective Rates and Billable Hours Establishing the Effective Rate for the Firm to Achieve the Profit Goal of $25/Hour. EXERCISE #7 - Calculation of Individual Employee Rate BILLING RATES GOAL BREAK EVEN RATE Billable Hours 1,300 1,600 1,900 Billable Hours 1,900 1,900 1,900 Billing "A" Rate $ $ $ Billing "A" Rate Value of Time Worked 156, , ,000 Value of Time Worked 208, ,556 Write Downs of WIP 10% (15,600) (19,200) (22,800) Write Downs 10% (20,833) (10.96) (15,556) Billed Amount 140, , ,200 Billed Amount 187, ,000 Effective Rate $ $ $ Effective Rate Direct Labor 80,000 80,000 80,000 Direct Labor 80, ,000 Direct Expenses 40,000 40,000 40,000 Direct Expenses 40, ,000 Overhead 20,000 20,000 20,000 Overhead 20, ,000 Total Cost 140, , ,000 Total Cost 140, ,000 Break Even Rate Billed Amount 140, , ,200 Billed Amount 187, ,000 Total Cost 140, , ,000 Total Cost 140, ,000 Profit ,800 65,200 Contribution 47,500 0 Profit Per Billable Hour Goal Per Billable Hour Goal Direct Labor Per Billable Hour Calculated Rate Direct Expenses Per Billable Hour Write Downs 10% (10.96) Overhead Per Billable Hour Total Cost Total Cost Per Billable Hour Billing Rate Effective Rate Total Cost Per Billable Hour Contribution Per Billable Hour Goal Per Billable Hour

20 A Profit Plan Using Effective Rates and Billable Hours EXERCISE #8 ATTORNEY Billing Hours 1,600 Calculated Rate (1) Billing "A" Rate $ Total Cost Per Hour Value of Time Worked 192,000 Billed Amount 172,800 Write Downs of WIP 10% (19,200) Value of Time Worked 192,000 Billed Amount 172,800 % of Billings to Value of Time Worked 90% Effective Rate $ Total Cost Per Hour / % of Billings to Value of Time Worked Direct Labor 80,000 Goal Per Billable Hour * 25 Direct Expenses 40,000 Write Downs of WIP 10% 10% Overhead 20, Total Cost 140,000 % of Billings to Value of Time Worked 90% 2.78 Billed Amount 172,800 Calculated Rate Total Cost 140,000 Profit 32,800 Goal Per Billable Hour Preferred Billing Rate (2) Profit Per Billable Hour Goal Per Billable Hour Break Even Billing Rate (3) Direct Labor Per Billable Hour Total Cost Per Hour Direct Expenses Per Billable Hour % of Billings to Value of Time Worked 90% Overhead Per Billable Hour Break Even Billing Rate Total Cost Per Billable Hour Effective Rate Total Cost Per Billable Hour Contribution Per Billable Hour Goal Per Billable Hour (1) THE CALCULATED RATE = TOTAL COSTS PER HR / ( % OF BILLINGS TO VALUE OF TIME WORKED ) + (GOAL PER HR * WRITEDOWN %) / ( % OF BILLINGS TO VALUE OF TIME WORKED ) (2) THE PREFERED BILLING RATE = THE CALCULATED RATE + THE GOAL PER HOUR (3) THE BREAK EVEN RATE = THE COST PER HOUR / ( % OF BILLINGS TO VALUE OF TIME WORKED )

21 ESTABLISHING THE EFFECTIVE RATE FOR THE FIRM TO ACHIEVE THE PROFIT GOAL A PROFIT PLAN USING EFFECTIVE RATES AND BILLABLE HOURS OF $25/HOUR. EXERCISE #9 EXERCISE #8 - COMPUTE THE AMOUNTS BELOW IN THE NUMBERED SEQUENCE USING THE CORRESPONDING FORMULAS. BREAK ATTORNEY BILLING RATES GOAL EVEN RATE BILLABLE HOURS 1,600 BILLABLE HOURS 1,600 1,600 1,600 BILLING "A" RATE $ CALCULATED RATE (1) VALUE OF TIME WORKED 192,000 WRITE DOWNS PER HOUR (7) (12.50) (9.72) WRITE DOWNS OF WIP 10% (19,200) TOTAL COST PER HOUR (8) BILLED AMOUNT 172,800 PREFERRED BILLING RATE (2) EFFECTIVE RATE $ BREAK EVEN RATE (9) VALUE OF TIME WORKED (3) 200, ,556 DIRECT LABOR 80,000 WRITE DOWNS OF WIP 10% (4) (20,000) (12.50) (15,556) Direct Expenses 40,000 BILLED AMOUNT (5) 180, ,000 OVERHEAD 20,000 EFFECTIVE RATE (6) TOTAL COST 140,000 DIRECT LABOR 80,000 80,000 BILLED AMOUNT 172,800 Direct Expenses 40,000 40,000 TOTAL COST 140,000 OVERHEAD 20, ,000 PROFIT 32,800 TOTAL COST 140, ,000 BILLED AMOUNT (10) 180, ,000 PROFIT PER BILLABLE HOUR TOTAL COST 140, ,000 GOAL PER BILLABLE HOUR CONTRIBUTION (11) 40,000 0 DIRECT LABOR per Billable Hour CONTRIBUTION PER HOUR (12) Direct Expenses per Billable Hour GOAL OVERHEAD PER BILLABLE HOUR TOTAL COST PER BILLABLE HOUR EFFECTIVE RATE TOTAL COST PER BILLABLE HOUR CONTRIBUTION PER BILLABLE HOUR GOAL PER BILLABLE HOUR FORMULAS: (1) THE CALCULATED RATE = TOTAL COSTS PER HR / ( % OF BILLINGS TO VALUE OF TIME WORKED ) + (GOAL PER HR * WRITEDOWN %) / ( % OF BILLINGS TO VALUE OF TIME WORKED ) (2) THE PREFERRED BILLING RATE = THE CALCULATED RATE + THE GOAL PER HOUR (9) THE BREAK EVEN RATE = THE COST PER HOUR / ( % OF BILLINGS TO VALUE OF TIME WORKED )

22 EXERCISE #10 Sample Bill Set Example #A Cost Total Billable Standard Hours Per Hour Cost Rate Billings Attorney #A , , Attorney #B , Attorney #C Expenses Total , , Total Hours Cost 4, Goal Per Billable Hour Contribution at $25 Per Hour 1, Contribution 1, Billing Floor 5, Attorney #A Attorney #B Attorney #C Billable Hours 1,600 Billable Hours 1,200 Billable Hours 1,900 Billing "A" Rate Billing "A" Rate Billing "A" Rate Value of Time Worked 192,000 Value of Time Worked 270,000 Value of Time Worked 171,000 Write Downs of WIP 10% (19,200) Write Downs of WIP 10% (27,000) Write Downs of WIP 10% (17,100) Billed Amount 172,800 Billed Amount 243,000 Billed Amount 153,900 Effective Rate Effective Rate Effective Rate Direct Labor 80,000 Direct Labor 200,000 Direct Labor 60,000 Direct Expenses 40,000 Direct Expenses 40,000 Direct Expenses 40,000 Overhead 20,000 Overhead 20,000 Overhead 20,000 Total Cost 140,000 Total Cost 260,000 Total Cost 120,000 Billed Amount 172,800 Billed Amount 243,000 Billed Amount 153,900 Total Cost 140,000 Total Cost 260,000 Total Cost 120,000 Profit 32,800 Profit (17,000) Profit 33,900 Direct Labor Per Billable Hour Direct Labor Per Billable Hour Direct Labor Per Billable Hour Direct Expenses Per Billable Hour Direct Expenses Per Billable Hour Direct Expenses per Billable Hour Overhead Per Billable Hour Overhead Per Billable Hour Overhead Per Billable Hour Total Cost Per Billable Hour Total Cost Per Billable Hour Total Cost Per Billable Hour 63.16

23 EXERCISE #11 Billable Hours 100, , % Standard Billable Rate $ $ % Value of Time Worked 12,000,000 14,300,000 Write Downs of WIP 10% (1,200,000) (715,000) 5.0% Billed Amount 10,800,000 13,585,000 Effective Rate $ $ Direct Labor 6,500,000 6,500,000 Direct Expenses 2,500,000 2,500,000 Overhead 1,000,000 1,000,000 Total Cost 10,000,000 10,000,000 Billed Amount 10,800,000 13,585,000 Total Cost 10,000,000 10,000,000 Profit 800,000 3,585, % Profit Per Billable Hour Goal Per Billable Hour Direct Labor Per Billable Hour Direct Expenses Per Billable Hour Overhead Per Billable Hour Total Cost Per Billable Hour Effective Rate Total Cost Per Billable Hour Profit Per Billable Hour Goal Per Billable Hour Income 800,000 3,585,000 Income Per Partner Without Draws 53, , % Guaranteed Payments Per Partner 200, ,000 Income Per Partner 253, ,000 73%

24 Profit Planning and Cost Accounting For a Law Firm Most service industries do not believe that cost accounting applies to them. It is strictly for other industries like manufacturing. How could you possibly have cost accounting for a law firm? I am here to say, all law firms should implement a cost accounting system if they want to understand their own business. By implementing a cost accounting system, you can tell if a client is profitable or not. You can tell if producers-attorneys, or paralegals are profitable. You can tell if divisions within the firm are profitable. If you have a firm with multiple offices, you can tell if each office is profitable. This information is valuable when considering mergers or acquisitions. The biggest challenge for a cost accounting system is how to allocate overhead. The cost accounting program that I developed calculates overhead at a minimum, approximately 10% to 15%. The secret to a good cost accounting system is to have most expenses directly allocated to a producer. By doing this you can actually achieve a cost per hour for each producer. This enables you to establish a profit plan based upon goals set above cost per hour rates. For example, if a partner has 1,000 chargeable hours per year and his/her cost per hour is $225, his or her billing rate must be at least $225 per hour, to break even. If your profit plan goal is to make $30 per hour, then his/hers billing rate must be at least $255 per hour. Most firms establish billing rates by assumption. Attorney Smith has been here for 15 years and does good work. His billing rate is $250 per hour. Attorney Jones has been here for 12 years but she is really good at what she does and is a specialist. Her billing rate is $300 per hour. After understanding the costs to Attorney Smith and Attorney Jones, the cost per hour for Attorney Smith may be $150 per hour and the cost for Attorney Jones may be $325 per hour. This would make Attorney Smith very profitable ($100/hr.) to the firm and we would lose money on Attorney Jones (-$25/hr.). This holds true for every client of the firm, as well. The cost accounting system would tell you if clients are profitable or not. After understanding your costs, you should establish a profit plan for the firm. A profit plan is different than a budget. A budget is expense driven, while a profit plan is revenue driven. A profit plan establishes revenue goals that the firm works toward each year.

25 Action Plan 1) Implement a cost accounting system. 2) Establish cost per hour for each producer. 3) Identify profitability by producer, client, division, and office. 4) Establish a profit plan for the firm. By: Samuel Catanese, CPA Leading Partner Catanese Group

26 Profitability Analysis All Clients Net Net Emp Billed Billed Effective Cost Total Profit Profit Name Hours Value Write off Fees Collections Rate Per Hour Cost Collections Billings Client ,000 (2,000) 98,000 98,000 $ $ ,000 33,000 33,000 Client ,000-10,000 9,000 $ $ ,500 (5,500) (4,500) Client 3 1, ,000 (10,000) 170,000 90,000 $ $ ,000 (30,000) 50,000 Client ,000-10,000 10,000 $ $ ,000 5,000 5,000 Client ,000 3,000 5,000 5,000 $ $ ,000 3,000 3,000 Client ,000 (3,000) 13,000 12,000 $ $ ,560 (1,560) (560) Client ,000-24,000 25,000 $ $ ,800 1, Client ,000-33,000 33,000 $ $ ,000 3,000 3,000 Client ,000-44,000 20,000 $ $ ,500 (14,500) 9,500 Client ,000 (10,000) 25,000 50,000 $ $ ,500 21,500 (3,500) Additional Clients Totals 100,000 12,500,000 (900,000) 11,600,000 11,450,000 $ ,400,000 50, ,000 11

27 Profitability Analysis All Professionals Net Net Emp Billed Billed Effective Cost Total Profit Profit Name Hours Value Write off Fees Collections Rate Per Hour Cost Collections Billings Attorney 1 1, ,430 (7,430) 150, ,000 $ $ ,185 1,815 3,815 Attorney 2 1, ,500 31, , ,000 $ $ ,600 33,400 33,400 Attorney 3 2, ,043 (5,043) 350, ,000 $ $ ,303 68,697 68,697 Attorney 4 1, ,500 (7,500) 180, ,000 $ $ ,500 5,500 10,500 Attorney 5 1, ,000 (8,000) 200, ,000 $ $ ,000 8,000 8,000 Attorney 6 1, ,000 (38,000) 200, ,000 $ $ ,500 (22,500) (12,500) Attorney 7 1, ,600 (12,600) 225, ,000 $ $ ,000 (20,000) 18,000 Clerk 103 5,682 (82) 5,600 5,200 $ $ ,578 (378) 22 Paralegal 2 1,103 93,738 (3,738) 90,000 85,000 $ $ ,635 (7,635) (2,635) Paralegal 3 1, ,012 (12) 170, ,000 $ $ ,641 39,359 39, Additional Attorneys Totals 100,000 12,500,000 (900,000) 11,600,000 11,450,000 $ ,400,000 50, ,000 12

28 Profitability Analysis All Divisions Net Net Billed Billed Effective Cost Total Profit Profit Divisions Hours Value Write off Fees Collections Rate Per Hour Cost Collections Billings Division ,000 (2,000) 70,000 68,000 $ $ ,540 (1,540) 460 Division 2 5, ,000 (25,000) 815, ,000 $ $ , , ,453 Division 3 2, ,000 (35,000) 400, ,000 $ $ ,891 (18,891) (18,891) Division ,000 1,000 70,000 70,000 $ $ ,279 3,721 3,721 Division 5 1, ,000 (3,000) 300, ,000 $ $ ,288 94,712 (5,288) Division 6 1, ,000 (10,000) 140, ,000 $ $ ,600 (35,600) 4,400 Division 7 8,000 1,040,000 (60,000) 980, ,000 $ $ ,000 20,000 20,000 Division 8 3, ,000 (20,000) 400, ,000 $ $ ,000 (75,000) 25,000 Division 9 4, , , ,000 $ $ ,000 68,000 68,000 Division ,500 (1,500) 10,000 10,000 $ $ ,400 (1,400) (1,400) Add Divisions Totals 100,000 12,500,000 (900,000) 11,600,000 11,450,000 $ ,400,000 50, ,000 13

29 Profitability Analysis All Billing Classes Net Net Producer Billed Billed Effective Cost Total Profit Profit Type Hours Value Write off Fees Collections Rate Per Hour Cost Collections Billings Partners 26,000 5,200,000 (100,000) 5,100,000 4,900,000 $ $ ,200,000 (300,000) (100,000) Associates 38,000 4,800,000 (300,000) 4,500,000 4,480,000 $ $ ,180, , ,000 Paralegals 12,000 1,100,000 (130,000) 970, ,000 $ $ , ,000 94,000 Clerks 3, ,000 (90,000) 90,000 90,000 $ $ ,000 (60,000) (60,000) Totals 100,000 12,500,000 (900,000) 11,600,000 11,450,000 $ ,400,000 50, ,000 14

30 Profitability Analysis Division Where Individuals Performed Services Billed Billed Effective Cost Total Profit Profit Employee Name Division % Hours Value Write off Fees Collections Rate Per Hour Cost Collections Billings Attorney 11 Division 1 0.2% $ $ Attorney 11 Division 2 0.1% $ $ (3) 22 Attorney 11 Division 3 0.2% $ $ Attorney 11 Division 4 0.1% (25) $ $ (26) (1) Attorney 11 Division % 1, ,875 18, , ,000 $ $ ,015 27,985 37,985 Add Divisions Totals 100.0% 1, ,000 16, , ,000 $ $ ,400 26,600 37,600 Net Net Paralegal 12 Division 1 0.1% $ $ Paralegal 12 Division 2 0.8% ,000 1,000 $ $ Paralegal 12 Division 3 3.8% ,250 (2,463) 1, $ $ ,653 (2,911) (1,865) Paralegal 12 Division % ,660 (9,660) 75,000 72,610 $ $ ,758 (148) 2,242 Paralegal 12 Division 5 3.5% ,817-3,817 3,817 $ $ , Add Divisions Totals 100.0% 1, ,500 (500) 110,000 95,000 $ $ , ,035

31 Profitability Analysis Division 19 Net Net Billed Billed Effective Cost Total Profit Profit Employee Name % Hours Value Write off Fees Collections Rate Per Hour Cost Collections Billings Attorney % ,000 (500) 27,500 27,000 $ $ ,000 3,000 3,500 Attorney % ,100-2,100 2,100 $ $ , Attorney % ,902 (2) 22,900 22,900 $ $ ,953 2,948 2,948 Attorney % ,300 (200) 2,100 3,000 $ $ , (180) Attorney % , ,000 2,000 $ $ , Additional Attorneys Totals ,000 (1,000) 71,000 73,000 $ ,000 8,000 6,000 Division 20 Net Net Billed Billed Effective Cost Total Profit Profit Employee Name % Hours Value Write off Fees Collections Rate Per Hour Cost Collections Billings Attorney % 1, , , ,000 $ $ ,000 36,000 12,000 Attorney % ,100-2,100 2,100 $ $ , Attorney % ,715 (15) 9,700 9,500 $ $ ,464 1,036 1,236 Attorney % ,000-46,000 46,000 $ $ , Attorney % ,828 (828) 69,000 35,000 $ $ ,828 (34,828) (828) Additional Attorneys Totals 6, ,000 (26,000) 815, ,000 $ $ ,000 56,000 77,000 Catanese Group 2007

32 Fire Clients and Increase Profits I know it is taboo in most firms to even suggest that a client should be fired. Most partners in a law firm would get sick to their stomach just thinking about it. I am suggesting that there are some clients of your firm that you should fire. If you ve never fired a client and you do it for the first time, you will feel a sense of power and satisfaction that you seldom feel professionally. Now, I am not suggesting that you fire a client because they ticked you off this morning. There is a way to identify the proper clients to fire. Most partners believe that if you have a large client, then they must be profitable. I am here to tell you that that is not always the case. In fact, an average of 30 to 40% of large clients are not profitable to firms like yours. In some firms, the percentage is even higher. How do you identify which clients to fire? You start by classifying your clients into four categories: A, B, C, and D Clients. I have developed a cost accounting system and have implemented it many times to categorize the clients of a firm. A Clients are high volume and high-income. B Clients are low volume and high-income. C Clients are high volume and low-income. D Clients are low volume and low-income. The C Clients are high volume clients that many not be profitable to the firm. These are the clients I spoke about earlier who fall into that 30 to 40% of large clients who do not bring a profit to the firm. I am not suggesting, however, that you fire these clients. They cover a large portion of your overhead. They just need to be managed better. You must identify why they are not profitable and correct the problem. A good cost accounting program will do just that. Now for the D Clients. All firms have D Clients. They bring no value or purpose to your firm. There is always a rationalization or excuse as to why they are with the firm. The biggest problem with these clients is that the partner-in-charge always has a reason to keep them. They, on average, represent 3 to 5% value and take 10 to 15% of your resources. The D Clients are the ones you want to fire. Do it and do it now! Fire them and see your profits increase! Action Plan 1. Classify your clients into the four categories. 2. If you cannot do that with your current accounting system, implement a new, effective cost accounting system. 3. Manage your clients to turn C Clients into A Clients. 4. Manage your D Clients into B Clients, and if you cannot do so, fire them and watch your net income grow. By: Samuel Catanese, CPA Leading Partner Catanese Group

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34 Client Revenues Profit A High High B Low High C High Low D Low Low Billing Rate Cost Hours Client Revenues Profit Total Cost Variable Fixed Cost $ $ ,400 A 6,600,000 1,044,000 5,556,000 4,822, ,333 $ $ ,750 B 1,500, ,000 1,194,000 1,027, ,667 $ $ ,700 C 4,200,000 45,000 4,155,000 3,688, ,667 $ $ ,150 D 1,200,000 (495,000) 1,695,000 1,561, ,333 $ $ ,000 13,500,000 $ 900,000 12,600,000 11,100,000 1,500,000 15

35 Client Revenues Profit A High High B Low High C High Low D Low Low Billing Rate Cost Hours Client Revenues Profit Total Cost Variable Fixed Cost $ $ ,400 A 6,600,000 1,044,000 5,556,000 4,822, ,333 $ $ ,750 B 1,500, ,000 1,194,000 1,027, ,667 $ $ ,700 C 4,200,000 45,000 4,155,000 3,688, ,667 $ $ ,150 D 1,200,000 (495,000) 1,695,000 1,561, ,333 $ $ ,000 13,500,000 $ 900,000 12,600,000 11,100,000 1,500,000 Client Revenues Profit Total Cost Variable Fixed Cost $ $ ,400 A 6,600, ,455 5,627,545 4,822, ,878 $ $ ,750 B 1,500, ,740 1,210,260 1,027, ,927 $ $ ,700 C 4,200,000 (528) 4,200,528 3,688, ,195 $ $ ,850 12,300,000 $ 1,261,667 11,038,333 9,538,333 1,500,000 $

36 Client Revenues Profit A High High B Low High C High Low D Low Low Billing Rate Cost Hours Client Revenues Profit Total Cost Variable Fixed Cost $ $ ,400 A 6,600,000 1,044,000 5,556,000 4,822, ,333 $ $ ,750 B 1,500, ,000 1,194,000 1,027, ,667 $ $ ,700 C 4,200,000 45,000 4,155,000 3,688, ,667 $ $ ,150 D 1,200,000 (495,000) 1,695,000 1,561, ,333 $ $ ,000 13,500, ,000 12,600,000 11,100,000 1,500,000 Billing Rate Cost Hours Client Revenues Profit Total Cost Variable Fixed Cost $ $ ,400 A 6,600, ,455 5,627,545 4,822, ,878 $ $ ,750 B 1,500, ,740 1,210,260 1,027, ,927 $ $ ,700 C 4,200,000 (528) 4,200,528 3,688, ,195 $ $ ,850 12,300,000 1,261,667 11,038,333 9,538,333 1,500,000 Billing Rate Cost Hours Client Revenues Profit Total Cost Variable Fixed Cost $ $ ,400 A 6,600, ,111 6,044,889 4,822,667 1,222,222 $ $ ,750 B 1,500, ,889 1,305,111 1,027, ,778 $ $ ,150 8,100, ,000 7,350,000 5,850,000 1,500,000 15

37 Eliminate Eliminate D % D % Total change C change Revenues 13,500,000 12,300, % 8,100, % Variable Costs 11,100,000 9,538, % 5,850, % Fixed Costs 1,500,000 1,500, % 1,500, % Total Costs 12,600,000 11,038, % 7,350, % Profit 900,000 1,261, % 750, % 15

38 A Profit Plan Using Effective Rates and Billable Hours EXERCISE Eliminate D Eliminate D&C Billable Hours 135, ,850 72,150 Standard Billable Rate $ $ $ Value of Time Worked 15,000,000 13,666,666 9,000,000 Write Downs of WIP 10% (1,500,000) (1,366,667) (900,000) Billed Amount 13,500,000 12,300,000 8,100,000 Effective Rate $ $ $ Overhead 1,600,000 1,082, ,000 Direct Labor 11,000,000 9,956,133 6,450,000 Total Cost 12,600,000 11,038,333 7,350,000 Billed Amount 13,500,000 12,300,000 8,100,000 Total Cost 12,600,000 11,038,333 7,350,000 Profit 900,000 1,261, ,000 15

39 A Profit Plan Using Effective Rates and Billable Hours EXERCISE Opportunity Eliminate D Hours Combined Opportunity Billable Hours 135, ,850 18, , ,000 Standard Billable Rate $ $ $ $ $ Value of Time Worked 15,000,000 13,666,666 2,264,213 15,930,879 16,841,250 Write Downs of WIP 10% (1,500,000) (1,366,667) (226,421) (1,593,088) (1,684,125) Billed Amount 13,500,000 12,300,000 2,037,791 14,337,791 15,157,125 Effective Rate $ $ $ $ $ Overhead 1,600,000 1,082, ,800 1,600,000 1,600,000 Direct Labor 11,000,000 9,956,133 1,043,867 11,000,000 11,000,000 Total Cost 12,600,000 11,038,333 1,561,667 12,600,000 12,600,000 Billed Amount 13,500,000 12,300,000 2,037,791 14,337,791 15,157,125 Total Cost 12,600,000 11,038,333 1,561,667 12,600,000 12,600,000 Profit 900,000 1,261, ,124 1,737,791 2,557,125 15