Financial Management
Reading the firm's numbers
Financial management for legal organizations centers on the three statements and the metrics derived from them. The income statement shows revenue, direct costs, and overhead; the balance sheet shows assets, liabilities, and equity, including work in progress and accounts receivable; the cash flow statement explains liquidity. Candidates must be fluent in law-firm-specific metrics: realization (billed versus worked value), collection rate (collected versus billed), utilization (billable hours against available hours), leverage (associates per partner), and revenue per lawyer. Understand the lock-up concept: the days of work in progress plus days of receivables tied up before cash arrives.
Budgeting concepts matter too: fixed versus variable costs, direct versus indirect expenses, accrual versus cash accounting, and the difference between a budget, a forecast, and a pro forma. Pricing topics include hourly, fixed fee, contingency, and blended rates, and how each shifts risk between firm and client.
Traps in questions
- Mixing up realization and collection: realization is about converting time into billed value; collection is about converting bills into cash.
- Forgetting that write-downs reduce realization while write-offs (bad debt) affect collection.
- Confusing profit with cash: a profitable firm can still fail on liquidity.
- Treating all overhead as variable when computing break-even.
Worked example
A lawyer works 1,800 hours at a $300 standard rate. The firm bills $486,000 and collects $437,400. Worked value is $540,000, so realization is 486,000 / 540,000 = 90%. Collection is 437,400 / 486,000 = 90%. Combined yield is 81% of standard value. To improve cash, address either lever, but reducing lock-up days shortens the wait without changing either percentage.