Category: Cash Flow – Finances
Not all that long ago, I learned about a "new" source of cash. I hadn’t heard of this before.
Life insurance policies on older people can be sold — the buyer pays for the policy and "cashes in" when the insured dies. The price paid to the owner of the policy usually exceeds all the insurance premiums paid to date, and then some. This lump sum payment can be significant. And a new insurance policy, premiums paid annually, is a small fraction of the lump sum payment received on the old insurance policy.
This is similar to another creative product … reverse mortgages on residential real estate.
With the financial crises upon us, this $12 billion (2007) life settlement business has been hit hard … and older folks attempt to use "life settlements" to carry them through retirement when their other capital resources are dwindling is faltering. The buyers of these policies are finding that their sources of cash (banks and other investors) are having cash flow problems as well. Thus, the funds are drying up, and the number of buyers/investors in this type of asset is shrinking.
Our creativity in creating financial instruments in the last 20 years without adequate substantive backing has caused us problems. Perhaps our creativity will also get us out of the current dilemma. Postponing retirement may not suffice to keep us in our life style; it certainly will be a damper for those who have dreamed of traveling and just relaxing once they reached a certain age. With "that age" being pushed further out, there is likely to be great resenting and disappointment … this can cause illness … and this can exacerbate the aging problems and family cash strains.
Lawyers are finally listening to me when I say that their law practice has value and can be sold … this is one way to raise cash that will assist aging lawyers (Baby Boomers and others) to smooth out the wrinkles in their financial plans caused by recent economic events.
View page
Lawyers who have client trust (IOLTA) accounts were exposed to personal liability for a bank’s failure. The argument went something like this: The lawyer selects the bank into which the funds of a client are deposited. The funds could come from advanced fee payments, settlement amounts or trial victories. If the amounts for the benefit of a client, coupled with the funds of a client in the same bank, exceed $100,000, the balance above that amount is not FDIC protected. If not protected and lost because the bank fails, the lawyer as the principal in selecting the bank is strictly and personally liable to the client for the loss.
(more…)
View page
Many companies are going bankrupt. This is a growing practice area of the law. What will be the impact on the pension plans through bankruptcy? A number of large law firms are closing their doors … what will be the impact on their 401(k) plans? Have they become 101(k)’s, or gone away altogether?
Chapter 7’s usually terminates the 401(k) enabling the participant to roll it over into another appropriate plan. Chapter 11 may or may not impact the fund.
Staff should review the plans where there funds are placed . Unfunded employer contributions are at risk. There may be a full vesting if the firm discontinues contributions … but unfunded is still unfunded!
While I claim no specific expertise in this area, there has been an entire generation of employees/staff/associates, et al., who have counted on the growth of their pension plans for retirement, early or otherwise. Now, for the first time in years, there is a feeling among many that they may not be able to retire at all … or at least many years later than anticipated.
In the recent past, we talked about multiple generations working together in the same firm, with all of the consequent challenges of communication. While many thought the Baby Boomers (400,000 of them) would retire in the next 10 years, it is conceivable that they may not be able to leave because of the decreased value of their pensions and other savings.
What will happen?
View page
Listen to Patrick Lamb, a prominent attorney and leader in the discussion of value billing and alternative fees. In our podcast, I asked Patrick to discuss the impact of today’s crises on both legal fees and attorney compensation.
View page
Complete your daily timesheets by day’s end. The best practice is to keep a running log of time (software-based or otherwise) of everything you do as you do it. Or, certainly before leaving the office that day. Even if your memory rivals that of the elephant, you will miss things if you don’t do this every single day.
One missed 10th of an hour each day translates to 23 lost hours a year. At $100 per hour, computing this time, without doing more work at all, will result in $2,300 additional revenue. That isn’t much, but it’s more than a good dinner. Increase these numbers by your actual billable rate … and the time you actually don’t bill, you will increase revenue by a very significant number!
View page
Schadenfreude …
"Schadenfreude is the delight one finds in the misfortune of others. (Yes, from a German word, and pronounced: SHA-den-froy-duh.) But don’t let this emotion linger. Focusing too long on another’s failure — or even their success — means you’ve lost sight of your own business." (From Carolyn Elefant)
Never heard this word, and now in the same day, I’ve seen it twice … must be evidence of the depth of our economic depression …
View page
Law firms are not immune from the economic woes and financial crises being experienced by the rest of the economy. Other than a few law firms that have dissolved, though, the pain being felt by law firms as institutions is just not that bad. Laying off a few associates, or delaying the start date of recently hired graduates, may be novel for law firms, but is not huge in the grand scope of law firm economics.
Individual partners in Big Law may be feeling some pain, that is if you call "pain" taking home a few dollars less. A 20% decline in equity partners’ compensation when already earning $1,000,000 just doesn’t get much sympathy from many.
The real "hurt" is being felt by lawyers other than "Big Law," the small firms and sole practitioners. These lawyers can ill-afford a large reduction in compensation. They’re not at the top of the pack to begin with … and they generally represent clients in "personal," not "corporate," matters. Personal injury, family disputes, criminal defense and personal debtor claims, among others, tend to pay less to begin with. Couple this with reduction in number of clients and number of matters and slower payments, then you can begin to feel the real pain being felt in the profession.
While few can predict with any real accuracy the change in the economic winds, the demise of law firms is caused more, in my opinion, by poor business judgment of lawyers rather than the change in the winds. Expanding without a safety net, relying on only a few big clients while making capital expenditures relying on the continuity of that revenue, and failing to address assertively a declining realization rate are real reasons, among others, for law firm troubles.
It’s just too easy in our world to blame someone or something else! As Pogo said, "We have met the enemy and he is us." The reasons for law firm problems are generally as a result of poor business practices, plain and simple. Yes, there may be extenuating circumstances, but not such as to tear the firm apart or cause its demise. There is no entitlement … and there is only ourselves to blame. Given these premises, we can move forward to greater success.
View page
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.
View page
On Friday, I coached a client about selling his practice. Our conversation was far-ranging. I started with several questions of my client that, in my opinion, set the stage for all further deliberations. How do these questions resonate with you? What additional questions might you ask yourself?
- Why do you want to leave your practice?
- What do you want to do in the "second season of your life?"
- Do you want to retire, or start a new adventure?
- Can you achieve the same objective without selling your practice?
View page
During our program at the recently concluded ALM Law Firm Leaders conference, today, Running Your Firm as a Business – A Closer Look at the Middle Office, I had an ah-ha moment! The moderator of our panel, Ron Friedmann, Senior Vice President Marketing of Integreon, talked about Australia’s law firm, Mallesons. The firm received an award for innovation from the College of Law Practice Management. Their project created a whole new office environment – ostensibly this was to reduce expenses, but actually had a dramatic impact on revenue by enhancing their service for the benefit of clients; they increased the number of client contacts..
(more…)
View page
