The Role Of “Effective Rate” To Law Firm Profitability

There are 6 main profit drivers for all law firms:  Rate, realization, leverage, margin, operating expenses and cash flow.  Rate can be tracked in several ways.

• Standard rates are rates you would charge a client, all things being equal.  These are typically your highest rates.
• Worked rates are your actual rates you charge a client.  Worked rates are affected by client negotiation or perceived need to reduce rates to stay competitive.
• Billed rates are rates after you invoice a client.  Billed rates take into consideration both mark-downs and discounts.
• Collected rates are the final hourly fee after the invoice has been reduced to a zero balance.  Collected rates take into consideration write offs and other post-bill adjustments.

Rate can be measured from standard to billed or worked to billed to judge how well you are converting your work to invoiced fees.  These rates are measured on an accrual-basis.

Rates can also be measured from billed to collected.  These rates are measured on a cash-basis.

However, to get a full view of what happens to your standard rate as work moves through the billing cycle, firms need to measure the effective rate.  The effective rate can be measured either from standard to collected or worked to collected.

Measuring effective rate means creating targets, forecasting results, and holding your fee earners accountable for results.

The below chart shows how you can measure effective rate.  Click on the graph to download.

Goodbye GAAP, Hello IFRS

I wrote in April on More Partner Income about a CFO magazine article about the impending replacement of the Generally Accepted Accounting Principles (GAAP) standard for public accounting to the International Financial Reporting Standards (IFRS).

It appears the time has come.  According to a August 27th article in the Financial Times, “US companies are set to switch to international accounting rules in a move that will, for the first time, see all the world’s most important listed groups reporting according to the same set of standards.”

A “roadmap” has been proposed by the SEC to have US companies conform to the standard by 2014.

Christopher Cox, SEC chairman, said more groups were reporting under IFRS than US GAAP and the number would rise as other large economies made the switch. He said US GAAP would be marginalised if the US did nothing, making it harder for international investors to consider US companies.

As noted in the April post, this may mean nothing to you, especially if you report only on a cash basis.  However, if your firm is looking to get a true look at your financials, accrual based accounting is needed.  For those who were looking to GAAP, look again.  IFRS looks to be the new standard.

For more information on IFRS, click here to visit a page dedicated to it by Price Waterhouse Coopers.