1. Session 3 Financial Management

2. 1 Contents Introduction Our business Time Recording Credit Control & Payments on Account The Matter Status Report Estate Administration Management Report Billing Summary

3. 2 Introduction Principle 8 in the SRA Handbook requires us to: ‘run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles’ In order to achieve this all members of staff need to understand the importance of the topics covered in this session and then to apply them during the course of each working day. This means that fee earners in particular must operate their matters in accordance with these principles in order to ensure that they meet not only the firm’s requirements but that they carry out their own ‘role in accordance with ‘sound financial and risk management principles’

4. 3 Our Business In its most fundamental terms our business comprises the following key stages: We: Buy Time Apply knowledge and expertise Add value Deliver the product or service Invoice Get Paid

5. 4 Time Recording Time Recording is not optional The purpose of time recording is to account for your time – to account for ALL of your time It is not to simply record what you consider may be recoverable from the client The decision as to whether any time recorded can be charged is a decision that must be made in conjunction with the firm’s management Your obligation therefore is simply to record ALL time spent on ALL client matters against that matter without regard to its recoverability

6. 5 Chargeable Hours and Recovery Rates As part of the firm’s duty to ‘run our business in accordance with sound financial management principles’ we must compute the recovery rate of each fee earner engaged by the firm. This is a key indicator of profitability and therefore of the firm’s financial stability. A fee earner who is engaged by the firm on a full time basis will be engaged by the firm for a total of 227 days after allowing for holidays and bank holidays. This is a total of 1589 hours per year or 132.42 hours per month. If your charging rate is £225 per hour this gives a potential recovery of £29,794 per month. A fee earner with a charging rate of £225 per hour who is billing at the rate of £15,000 per month therefore has a recovery rate of just over 50%. Just take a moment to work out your own recovery rate and think carefully how this can be improved… This will always be a consideration when it comes to performance appraisals for the simple reason that this is an area that we all need to work to improve. In a well performing firm the average recovery rate will be no less than 66.6% with 75% ranking as excellent

7. 6 Opportunity Cost The term ‘opportunity cost’ will be unfamiliar to most fee earners. It is nevertheless important to understand what it means if we are to truly appreciate the true cost of time that we fail to record or perhaps charge. Opportunity cost is the true cost to the firm of the failure to sell the time we have bought. In other words if we have bought 7 hours of time from a fee earner with a charging rate of £225 every hour that we fail to sell at the full rate has an ‘opportunity cost’ to the firm of the difference between £225 and the amount actually recovered. In addition to that ‘opportunity cost’ we need to add the costs for that hour incurred by way of salary, national insurance and overheads that are attributable to each fee earner. It is therefore not difficult to see that the true cost of every unrecorded or unrecovered hour will always exceed your hourly rate

8. 7 15 Things you can do to improve recovery There are at least 15 things that most fee earners can do in order to improve their recovery rate and therefore your chances of earning a bonus: 1.Give accurate and truthful estimates based on your desire to recover your charging rate in full for the work done (there are exceptions where this may not be possible but these should only be applied if agreed with management in advance. Some wills and residential conveyancing matters are good examples but even with these there are ways to improve your recovery rate) 2.Record your time every hour – do not leave it until the following day 3.Check your recorded time at the end of each day to ensure that it adds up to the number of hours you have been at work 4.Always round up – 3 minutes = one 6 minute unit; 8 minutes = two 6 minute units 5.Don’t think about billing – just focus on accounting for your time

9. 8 15 Things you can do to improve recovery 6.Imagine that you are only being paid for the time that you record – this is an excellent way of concentrating one’s mind 7.Train your support staff to undertake work that you would normally do yourself and then delegate work to them and get them to record and charge for the work done – this will free up your time and make you more efficient 8.Look for ways to improve your efficiency – better precedents, voice recognition software, avoid re-inventing the wheel 9.Charge where you have added value – we do not charge solely on the basis of time recorded. We are permitted to AND SHOULD charge for value added 10.Believe in your true value – if you have a recovery rate of 50% it is akin to saying your charging rate is £112.50 (at £225 per hour). A mechanic will charge you a minimum of £80 an hour !!

10. 9 15 Things you can do to improve recovery 11.Record EVERYTHING you do on a client matter to that matter 12.Only use non chargeable codes for time spent on non client matters 13.Use proper narratives (see later slide) 14.Work on the basis that others should be able to raise invoices on your matters simply by printing your time records – if you are able to delegate this process to others it will save you more time as well 15.Track your recovery rate and work to improve it

11. 10 Time Recording – Non Chargeable Time Non Chargeable time comprises time spent on: Holiday Sick Leave Training Office Administration and should be recorded as such. It does not include any time spent on client work. This must ALWAYS be recorded against the client matter with a suitable description. It’s recoverability will be considered as described on the earlier slide.

12. 11 New Matters, Archived Matters & New Enquiries New Matters – time spent on new matters before they have been opened should be recorded manually and then entered as soon as the matter has been opened. Archived Matters – time spent on archived matters should be recorded manually if there is a chance that the matter will re-open. If not then it should be recorded as non chargeable Office Administration. New Enquiries – time spent on new enquiries (‘prospects’) should be recorded manually and retained with your attendance note so that it can be recorded in the event that the instructions are confirmed. If instructions are not confirmed it can be recorded as non chargeable office administration. Chargeable time includes file opening and preparation of client care letters etc

13. 12 Time Recording Narratives It is important that clear and meaningful narratives are included when entering your time. The following are examples of improvements that can be made in normal narratives. Weak DescriptionsStrong Descriptions TravelPreparation during travel FilingReviewing and updating your file ResearchConsidering issues and preparing for meeting File openingTaking and progressing your instructions BillingKeeping you updated on costs SupervisionDiscussing with colleagues and preparing

14. 13 Credit Control and Payments on Account Fee earners commonly make the mistake of assuming that we should extend credit to all new clients that we take on. There is no commercial reason why we should do this except in circumstances where: 1.The client has a proven track record with the firm (and is therefore ‘good for the money’) 2.We have security of payment – this will generally apply to residential conveyancing and probate matters It is therefore the firm’s policy to obtain payment in advance for instructions from clients who do not fall into the above categories. The purpose of obtaining payments on account is to ensure that we do not undertake work where there is a risk that we will not be paid. Payments on account should be sufficient to cover all disbursements and /or third party costs and our costs for the work done between receipt of instructions and the payment of our invoice(s)

15. 14 Credit Control and Payments on Account We should always hold payments on account until the final invoice has been issued. In other words payments on account should not be used for the settlement of our first invoice. This defeats the purpose of a payment on account in relation to ongoing work. For example, if we take on a new family matter and estimate that the costs to be incurred between the instruction and the first invoice will be £1000 + VAT we need a payment on account of £1200. The client should then pay the first invoice on or before its due date and we should continue to hold the payment on account until the final invoice has been raised. If further work in excess of £1000 needs to be done at any time then further funds on account should be requested. Where we are instructing third parties we must obtain cleared funds in full before issuing such instructions on behalf of the client. Payments on account must always include and take into account any VAT that may be payable.

16. 15 Credit Control and Payments on Account We should therefore never be in a position where the work undertaken but not billed (the WIP) at any time exceeds the amount of the payment held on account. Our invoices are due for settlement within 14 days of issue. Fee earners should keep a close eye on their matters (using the Matter Status Report) to ensure that all client pay their invoices on time. Serious consideration should be given to stopping work on all matters where we have not been paid on time and work should only continue on these matters with the approval of the COFA. Failure to apply these principles risks breaching your obligations under Principle 8 of the SRA Handbook

17. 16 The Matter Status Report The Matter Status Report is sent by email to each fee earner at least once a week. It contains a summary of the financial position in relation to all matters in your name. In particular it shows for each matter: Ledger balances WIP Unpaid bills Date of last bill Fee estimate Age of the matter Risk level The current status

18. 17 The Matter Status Report (cont.) It also includes additional tabs (worksheets) for the following: Credit control notes A summary of the current status of all matters Enquiries Prospects New clients New matters Missing ID and incomplete risk assessments File review information You should ensure that you review this information each week and update each matter in Compliance Manager for any missing or incomplete work.

19. 18 The Matter Status Report (cont.) The MSR is therefore an essential management tool that you should use on a regular basis (at least weekly) in order to identify: The current status of each matter Slow moving matters Clients who have not paid us Outstanding risk management issues WIP levels Matters which can be billed Any additional payments on account that may be required Any costs updates that need to be advised given the level of WIP compared with the current fee estimate You should therefore ensure that you take the appropriate action following your weekly review to ensure that all of the information is correct and that any risks identified are addressed.

20. 19 Estate Administration Management Report Estate administration is a significant part of our business. It makes in value terms the largest contribution to our fee income. It is essential therefore that all estate administration matters are: Priced carefully Processed efficiently It can however also be a lengthy process and as such represent a large investment in time and effort that can be locked up in the firm’s WIP. One of our main targets therefore is to ensure that all estate administration matters are processed as efficiently and as quickly as possible. The management team therefore need to understand the level of this investment at all times and to ensure that we are doing all that we can to minimise the amount of the firm’s capital that is locked up in this process. All fee earners with responsibility for the conduct of estate administration matters should provide the COFA with a short updated progress report on each matter at the end of each month using the EAM Report which can be found on the intranet.

21. 20 Billing Unless specifically agreed otherwise with a client we expect to invoice clients at the end of each month for all work done in relation to each matter. The only exceptions to this general rule are for: Residential conveyancing Estate administration before grant of probate has been obtained Matters which are likely to be completed within 6 weeks All bills should be completed by the billing deadline date for that month. Unless specifically agreed with the management all bills should equal or exceed the current value of the WIP. Do not forget to consider the addition of any value element that may be appropriate. In the event that you have any WIP on a matter which you consider may not be recoverable in full you should email the COFA with a request for such WIP to be written off before invoicing. You should provide as much information as possible to explain the circumstances giving rise to such a request.

22. 21 Billing (cont.) Billing estimates and targets You will be aware that all fee earners have monthly targets to achieve. You should therefore give consideration as early as possible in the month in order to identify how you are planning to reach your target for the month and the Matter Status Report will assist you in this process. In the event that you consider that you may not achieve your target for the month you should notify the COFA as early as possible in the month. Disbursements You should take care when preparing your bills to ensure that you identify all disbursements to be included and that you distinguish between those which are ‘paid’ and ‘unpaid’ Additional Fees Remember that additional fees (which are not disbursements) may need to be added to your bill. These may include TT / CHAPS fees and the regulatory fee.

23. 22 Summary Effective financial management is an essential part of your duties and obligations as a fee earner both to the firm and to your regulatory authority. You must therefore ensure that you follow the guidelines set out in this presentation. This will not only benefit the firm and your current and future colleagues but will also enable you to maximise your potential earnings and the contribution that you are able to make to the firm’s current and future success.

24. 23 Final comments Any questions? Email to nigel.harper@parfittcresswell.comnigel.harper@parfittcresswell.com Update your training records in Compliance Manager