Practice Management

Risk Management in Your Legal Business

In the corporate business world, risk management always forms a big part of corporate strategy. Risk Management is especially topical right now, given the worldwide recession, which was precipitated by unchecked risk taking at the highest institutional level. So the question arises… how should the average attorney be looking at managing risk? How do you even begin to factor business risks into the way you manage your firm?

Start Simple
You can only manage risk effectively, if you have sufficiently accurate data to analyse. If we accept that accurate data is a non-negotiable then we must also accept that you need an intuitive Practice Management System, which records all activity in the practice - in detail. Here are some examples of they type of data that needs to be captured:

  • Client Information (including but not limited to FICA requirements). You need to know who you are contracting with; their industry and their standing in that industry.
  • When taking instructions on a matter, you need to know as much about the work that is required before deciding on your approach.
  • As you work on the matter, you need to ensure that all fees, disbursements, notes, e-mails and letters are captured accurately against the matter. You need to make sure that all staff members consistently follow this principle and that you can therefore gauge the status of any matter accurately from a central point and at the touch of a button!

Common Risks
If your Practice Management system has provided you with a solid base, you will have a lot of data on clients; matters; business creditors as well as a solid financial management system, expressed via the General Ledger of the Practice. All this data is only valuable if you are able to "manage" the business according to what the data is telling you. Part and parcel of this "management" is avoiding the risks that have the potential to do persistent damage to your business:
  1. When client accounts are opened, you need to make sure that all your staff follow the provisions of FICA. Your system should have a specific process to guide users through the FICA requirements. This should be non-negotiable and mandatory on all new clients. The system should also have an easily accessible audit trail in this regard.

  2. Fee Management. There are many risk alerts that you should be looking into here:
    1. Cover. Ideally you should not be venturing into the "great unknown" with clients instructing you on complex matters with large costs and fees accumulating without a financial commitment from the client. It is entirely reasonable to ask the client for an upfront deposit or regular deposits as the matter progresses. This is especially important if there are large costs (advocates) involved. Your system should display the "cover balance" (trust balance less business balance) for users to see. That way everyone knows what the risk status is on any given matter. Consider the following:
      i. If the client has a problem paying a deposit, why would they suddenly have no problem paying you at the end of a matter?
      ii. Is it not better to develop a culture where you accept that not all clients are worth taking on from a risk point of view?

    2. Unbilled Fees (Work in Progress). It is all very well for you and your staff to record fees in a work in progress format. Problem is that very often these fees disappear into a black hole and become totally unmanageable. With the right systems in place, you should be able to review the quantum and age of all work in progress (or unbilled) fees and disbursements. It should be your goal to turn these fees into cash as quickly as is practically possible for the matter.

    3. Disbursements. Naturally you have a high risk to cash flow if your practice carries a large amount of disbursements. The management objective is to create "positive cash flow" by invoicing out the disbursements as soon as they arise. You then use the deposit you have or alternatively collect money from the client as quickly as possible and pay the business creditor only when the account becomes due. The effect is that not only have you avoided the risk of a cash flow shortage, but you have made the clients cash work positively, for your business!

    4. Under recovery of fees. Given that we have accepted that your systems accurately reflect the fees captured against matters as well as all detailed activity, it is important to evaluate the amount of work (time recorded for example( against the fee that was finally raised). The data should be telling you how the business is performing against your potential. You will minimise the risk of "opportunity loss" by scientifically establishing what your billing should be versus your gut feel - which is usually completely out of touch with reality!

  3. Managing Income and Expenses. It goes without saying that when any business is under pressure, the first financial report that comes under scrutiny is the Income Statement. A management system should allow you to analyse your income and expenses in the following ways:
    1. By Department. This should highlight if a particular department is performing poorly and which departments are your bred winners. Your risk management strategy should include regular reviews of each department.

    2. Period Analyses. If your reports tell you how you have done over (for example) the 12 previous periods or how your Year to Date performance for the current financial year measures up against the previous year's performance, you can determine if corrective action or a change in strategy is having the desired effect to your bottom line.

    3. By Branch. If you have branches it is important to measure each branch. Make sure that the money you are spending is worth the risk of the added overheads. Expansion is great as long as you minimise and manage the risks associated with growth. Your data gives you a cold hard answer to any questions you may have!

  4. Reconciliations. Whether you are doing a recon on the banks or a business creditor's account or verifying the correct amount to pay over to a client, it is vital that your system is up to the task. Reconciliation's are a vital control and eliminate the risks associated with over-paying; under-paying or misallocating receipts. If you pay a client the wrong amount and they pick up on the mistake before you do, this could lead to a break down in the relationship. You will have lost their trust in you and with that the work will be taken away!

  5. Trust Money. The biggest risk you face as an admitted attorney is falling foul of the trust regulations. Your management system should enforce key controls and provide you with easy to understand reports. You should be able to establish where trust money is invested and you should always be comfortable that your trust is always in balance (i.e. your trust investments must always = your trust commitments). Your system should also enforce the following controls for your staff:

    1. A payment must not be allowed if there are insufficient funds allocated to the trust on that matter/account.
    2. A payment must not be made directly from a 78 2 (A) Investment Account.
    3. The system should accurately reflect any interest payable to the Fidelity Fund at all times and not only at the year end audit.

The above are just a few of the common risks that all attorneys should be managing in their legal business on a daily basis. GhostPractice will assist you by providing you with the simple processes necessary to create an "accurate data store" and then will equip you with the sophisticated data analysis tools necessary to extract management information which will help you assess; avoid and manage any risk that the business environment can throw at you!

If you would like to learn more about managing the risks in your legal business; feel free to contact me via email at or on my cell phone 082-568-4738.

Yours in law

Matthew Spagnoletti

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