So Long...Farewell

This is my final article for the Tulsa Lawyer and the title says it all. I hear the tune from the Sound of Musicrunninginmyhead. Thishasbeenagreatyearand it’s flown by. So much activity in such a short period of time, and my efforts are insignificant when considered in comparison to the efforts of the TCBA’s Members. They have volunteered, contributed (financially and physically), and supported this organization to expand its influence by educating, assisting and empowering the membership and the larger community. I’m proud and honored to have served this past year, and I thank each of you for the support you’ve given to me. 20222023 is going to be an excellent year under Phil Hixon’s leadership, andI’mexcitedtoseehisplansimplemented. Here’s to the continued success of the Tulsa County Bar Association!

While most of my articles this past year have covered topics dealing with the larger community and our role in it, this month I’m going to provide some information that solo and small firm attorneys can use for themselves in navigating the process of planning. Understanding how revenue and expenditures relate is critical to success in business. As with all areas of life, if you don’t know where you are, you can’t plan your path forward. My hope is that this tool will help you plan – which will lead you to success. I also hope that it’s not as boring as it may first appear. Additionally, for those of you in larger firms, you may not be involved in the planning for the whole business, but this information can be extremely helpful in setting personal production and generation goals for the year. I’d like to say that I came up with this while diligently combing through resources, but I can’t. The concepts and numbers presented here have been with me since my auditing days and have been used by many for a long time. They are also applicable for any profession in which revenue is tied to a billing rate and the tracking of time worked on a project.

Several years ago, I led a class for the Women In Recovery participants on budgeting. Because of the circumstances which led them to become part of the program, I was sure some of them believed that they were being shown concepts that they somehow missed or just didn’t pick up. I made sure to point out that these concepts might be new to them, but they were new to many people because they just aren’t taught in our schools. The same holds true for the information below. It’s not a matter of intelligence or ability to learn. Any kind of planning and budgeting related to financial matters is all really just a product of calculations, but if you’ve never been introduced to the concepts or the information, planning will be a challenge. My hope is that if you fall into that category, this information will help you better plan for yourself and your practice.

Production and generation planning and budgeting can be considered a result of the interplay between several components:

• Billing Rate For TheAttorney • Number Of HoursAvailable To Work vs. Number Of Hours Worked/Production

• UtilizationAnd Realization

• TheAmount Of Work There Is To Do/Generation

Once you have these pieces, you can calculate an estimated revenue number either for a group of people or for yourself individually. Having this information available allows you to plan better and as the saying goes – no one plans to fail, they fail to plan. Here are how the components break down:

There is a general rule of thumb for determining what the billing rate of an attorney should be. Some calculate it to be 3x the base salary and some say it shouldbeasmuchas5xthatamount. Themultiplication factors are there to cover overhead1 , employment costs, and to allow for revenue. If you’re using 4x the salary amount, the calculation looks something like this: Yearly Salary: $75,000

Broken down into an hourly amount: $36.062

Hourly billing rate: $144.24 Once the overhead and employment expenses are covered, the billing rate can be adjusted to create an increased revenue stream, but if you don’t have a billing rate high enough to cover the expenses, you will lose money because there are only so many hours in the day and so many days in the week. As you’ll see in the numbers below, even the greatest employee is human and there is a limit to what can be generated through his or her efforts.

1 The overhead amount varies significantly depending on fixed and variable costs. You can see what those overhead costs are per person generally by taking total expenses and dividing it by the number of people in your company. There are 2,080 work hours in a year. However, that assumes there are no vacation days, sick days or holidays. That’s not realistic. So, to determine the number of hours that an employee can work, those days must be subtracted out. For example: Total number of hours in year: 2,080 Less: Vacation hours: (80) PTO: (40)

Holidays: Continuing Education: (68) (12)

Now, you can budget the total number of hours that the employee could possibly work. Depending on the firm and the dynamic. The total number could be over 1,880. It depends on the environment and the latitude provided for work/life balance. In the end, the budget or goal for the employee is a factor of company policy, employment agreements, and the amount of work available to the employee to do. Whatever it winds up being, this number, multiplied by the hourly rate of the employee (calculated above) will help to determine what kind of revenue can be generated from the employee’s work.

Utilization is the number of hours worked when compared to the total numbers budgeted. For example, if I expect an employee to bill 1,800 in a year and they bill 1,500, that employee’s utilization is 83.33%. In a perfect world, utilization would be 100%, but we are all human. There will be some inefficiencies in work. It just happens and often times, it’s created by the clients. So, just know that in planning, if you expect 100% utilization from your employees, you will fall short.

Realization is how much of a billed hour is collected. If an employee bills 15 hours and has a $200 per hour billable rate and if all of that employee’s time is billed, the invoice to the client is $3,000. The reality is, though, that some of that time may be reduced due to inefficiencies. So, maybe only $2,750 of that time gets billed and collected. That means that only 92.6% of that time has been “realized” in collected funds. There can also be a reduction in the realization if the client winds up not paying their bill in full.

Utilization and Realization work together. If an employee bills a high number of hours but is wasting time, his or her utilization will be stellar. However, when it comes time to bill, the hours worked may not actually be billed and so the realization will look awful. The interplay has to work and as with all things in life, it’s a balancing act.

All of the above calculations are great, but if there are no clients, they are meaningless. I’ve included this componentlast becausesettinggoals forproduction help you to determine what kind of generation needs to be accomplished. If you’ve completed the calculations and know that the billing rate of the attorney needs to be $150 per hour and that based on the budget for that attorney he or she is going to bill 1,800 hours that year, then you need to have 1,800 hours of work for that employee. If you also need to have billable hours, you will need to generate enough for both of you. That can seem daunting, but it can also give you comfort in knowing when you need to hire the next attorney and can assist you in determining when you should hire additional support staff to free up the attorneys to focus on billable time and not administrative tasks.

Additionally, depending on the type of work you do, if you have matters you do routinely, you can develop a workflow of the tasks that are associated with that type of matter and how long it takes to accomplish each one. By going through this exercise, you’ll be able todeterminehowmanyofaparticulartypeofmatteryou need to be able to meet the generation and production Face it, when you have a small firm there are administrative tasks that everyone does because it takes everyone to make it run, but once you reach a level of growth, these number will help you better determine the allocation of duties for maximum efficiency.

All of the above information works together and some of the components can work against each other. Again, it’s a balancing act. And, there are a myriad of ways for these numbers to work together. For example, as a business owner, you can plan for a reduction in revenue and net income in a year that you bring on a new associate because you know that some of your production will be reduced. However, that may free you up to do more marketing which can increase your generation – generation that might not otherwise have occurred. So, your production goes down, but your generation goes up and eventually, you’re back to having enough work to keep both the associate and you at capacity for work. It’s not an exact science and it is subject to personalities and personal goals, but if you understandhowthesecomponentsworktogether,you’ll be able to better plan for the path ahead and ultimate success.