Realization rate is the basis for survival
I received a call from a client today. He was talking about billing out $150,000 last month, but collecting only $90,000. This is a realization rate of 60%. In any business, if you collect 60 cents on the dollar, you are going to face disaster in short order. The same is true in the legal profession.
If you earn only 60%, in order to survive, you will need to treat the 60% as 100%. In other words, all your financial decisions will need to be based on the money actually collected, not on the billings sent out. If you can run your business on the 60%, that would be fine, but few lawyers can …
Lawyers must vigilantly focus their energy on collecting what they bill. Failure to do so will cause economic failure. Unlike good wine, accounts receivable do not get better with age. For help, see my book, Collecting Your Fee: Getting Paid from Intake to Invoice, published by the ABA.
Lawyers seeking growth have two ways: Increase revenue with new clients (or more work from existing clients) and increasing their realization rate. As noted in a previous post, focusing on reducing expenses can address only a small portion of the equation, P=R-E. Increasing your realization rate, however, enables you to take full advantage of the effort you’ve already expended.
The call caused me concern, but there is a bright side … It was the wake-up call to run the law practice well.Tags: Cash Flow - Finances, Management