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Expense or investment?

21 April 2011

Is your car an investment or an expense? Sounds like an easy question but it is an expense. Consider this for a minute - if your car is a silver 2010 Mercedes Benz C180 it is an expense, but if your car is a white 1954 Mercedes 300SL it's an investment. Why?

How about your watch? Same thing as it depends on a multitude of factors. If it is a Rolex there is a good chance it is an investment, but if it's a Fossil (like mine) it's definitely an expense (maybe in 20 years I'll be proven wrong and be pleasantly surprised).

What makes an item an investment or an expense? If you ask the accountants it's pretty straight forward. They will say that If an item is an economic resource; anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value, it is an investment. If an item results in an outflow of money to another person or group to pay for an item or service, or for a category of costs, it is an expense. If you ask the man in the street; he/she will give you a definition that will mostly make sense and in some way might even resemble the accountants' definition, because I believe we all know what the difference between an investment and an expense is,with the most common differentiator being whether it increases or decreases in value over time.

Extending this question to your staff will surely create some food for thought - investment or expense? From an accounting perspective the answer is simple- staff are an expense. They are represented in your income statement in the salaries expense line item (and possibly as a liability in your balance sheet if you haven't paid them by the end of an accounting period). From a business perspective it's more difficult to decide if staff are an investment or an expense. Staff are there to add value to your firm and over the long term increase the net worth of a firm, therefore they should be recognised as an investment (or an asset) in your financial records. But if the staff you hire are hopeless and don't deliver on what they were hired to do, or generate more revenue than they cost, then those staff members are liabilities or expenses.

So then, some staff should be classified as expenses and others as investments - right? However what if a particular staff member brings in more money than they cost in a particular month, but for the rest of the year they cost more than the revenue they bring into the firm? Whilst the accountants like to make things complicated to justify their jobs, they also like to make things simple enough so they don't have too much work to do!

Now for the solution, let us keep the accounting treatment and business value of staff separate! From a purely business value perspective, we still have to look at two categories of staff in your firm - fee earners and administrative staff. Fee earners are an investment if they generate more revenue than they cost and an expense if they cost more than the revenue they generate. With administrative staff it's more difficult to determine if they are an expense or an investment. Since Practice Managers fall into the latter category of administrative staff they are more difficult to classify as either an expense or an investment.

Before I give you my opinion, let me first define what a Practice Manager is. In my view a Practice Manager is the person who co-ordinates the efforts of the firm from an administrative perspective so that fee earners can focus on generating revenue; partners can focus on winning work (and generate revenue); other administrative staff can provide the best possible support to fee earners and partners; and clients are happy and properly looked after.

Before getting into what a Practice Manager should be doing, let's cover what he/she shouldn't be doing:

  • Organising dinners for the partner's friends and family;
  • Doing partners' holiday bookings;
  • Grocery shopping for the partners homes and running errands for the partners wives and children;
  • Setting up meetings for partners day-to-day activities;
  • Preparing EFT's and cheques for payment (not the same as validating EFT's and cheques);
  • Capturing invoices and statements (inwards and outwards ones);
  • Other basic data capturing activities and menial tasks (best suited to junior administrative staff).
In a lot of the firm's Practice Managers do these things and to be honest it's a waste of a good resource (which is what a Practice Manager is) and detracts from the meaningful contribution a serious Practice Manager should be making to the firm - which results in them being and expense and not an investment. If this is what you need, you should seriously consider hiring a junior administration person to do this job and out sourcing the Practice Management function (we can help with this). Then at least you should save money and get value from having a Practice Manager

What should a serious Practice Manager be doing? At a high level a Practice Manager's role should entail:
  • The firm's talent management function
    • Identifying and procuring superstars to work in the firm;
    • Motivating and rewarding staff to perform at their peak;
    • Managing staff and workload so that resources are used optimally;

  • Managing the firms operations
    • IT Management,
    • Facilities management,
    • Vendor Management,
    • Client Relationship management.

  • Managing Compliance
    • Law Society Compliance,
    • SARS compliance,
    • Other statutory compliance.

  • Managing the firm's finances (this is not processing debits and credits in a ledger- you hire a bookkeeper for that)
  • Profitability management
  • Revenue management
  • Cashflow management
  • Cost Management
In subsequent articles we will be delving into the specifics of the Practice Managers role, but for now it is most important to recognise that the role is more about Managing than doing and more about driving the firm forward (as per the strategy laid down by the Partners) as opposed to doing menial tasks a junior could handle. If your practice manager focuses on the above functions he will surely be an investment and will drive revenue up and manage costs effectively, thereby increasing your firm's profits.

If you are small practice and cannot afford to employ a full-time Practice Manager to focus on the above facets of the business, there are options available to you, so that you get the right Practice Manager for your firm without breaking the bank! Talk to us and we will explain how you can do this (by you making use of our Virtual Practice Management service). Furthermore if you are a small firm and need to combine roles to keep your staff costs as low as possible, why not hire a full time junior admin person to take care of the menial tasks and consider outsourcing the Practice Management function.

Whilst the role described above combines finance and operations functions, in an ideal environment (where money is not an issue), the finance and operations roles should be split so as to ensure that internal controls are more difficult to circumvent. This is just good business practice which in the long term reduces the risk of you being robbed blind. This is also another critical reason to consider outsourcing the financial management aspect of the Practice Management role and is another way to turn your Practice Manager into an investment.

Finally, probably the biggest way to turn your Practice Manager into an investment is to allow that person to take-over the functions which partners perform in terms of managing the firm on a day-to-day basis. This doesn't mean that partners lose control - it means letting partners have oversight of the operations without having to do/manage the day-to-day operations themselves! As a partner with even 25% time freed up from not having to play Practice Manager, how many more clients could you win and how many more hours of billable work could you generate? This alone could turn a Practice Manager into an investment!

If you would like to know more about GhostPractice, how we can help you with practice management, management or how GhostPractice is driving change in the legal industry feel free to call me on 084 586 6789 or email me at kubenn@korbitec.com.

Regards
Kuben Naidoo






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