General Tips for Finance and Budgeting
1. To best manage your cash flow, you need a monthly cash flow plan showing projected revenues and expected expenses for each month of the year. A cash flow plan is a living and breathing tool that reflects both what has actually happened relative to revenues and expenses and what you expect will happen in the future. It shows where you are now and where you will be in the coming months. By updating and reviewing the cash flow plan monthly (or more frequently), you will know how much revenue you will need to generate to cover expected expenses and can take steps to ensure that you have adequate cash flow.
2. Consider putting aside a percentage of your monthly revenue each month until you have set aside an amount equal to one month’s expenses. This will be your "rainy day" fund whenever you have an unexpected expense or an unexpected dip in revenue.
3. Establish a monthly draw of income based on what you think the firm will generate in net profit each month. You can take a second draw quarterly of any excess profit. Distribution of income should be based on the firm’s net profit. Avoid distributing more income than the firm’s net profit can support.
4. Put aside funds monthly for large expenditures that are paid in a lump sum(s) each year, such as malpractice insurance premiums.
5. Open three bank accounts – (1) an operating account; (2) an IOLTA trust account (discussed below), and (3) an account for your income and self- employment taxes, if applicable.
6. At the end of each month, deposit 20-25% of your net income into the income tax account so that as your quarterly income tax payments come due, you will have sufficient funds to make these payments without depleting your ordinary operating budget.
7. Aggressively pay down any debt you have and pay off your line of credit each year.
8. Bill monthly.
9. Aggressively manage your accounts receivable by sending letters to those who don’t timely pay their bills and following up with personal telephone calls if the bill is not promptly paid Consider prompt withdrawal, subjecti to ethical limitations if a client is ignoring your bill. For billable work, always obtain a retainer up front when at all possible.
10. Automate your firm accounting function. In order to effectively manage your firm finances, you need information that is most easily obtained when the accounting function is automated by using appropriate accounting software. You and your accountant will appreciate the automated income and expense reports that are easily printed from your accounting software.
11. Manage your personal finances with the same discipline as your firm. Avoid living beyond your means.
12. Keep your receipts! Attorneys are audited at a higher than average rate. Keep receipts for any expenses you intend to write off.
Poor firm cash flow planning coupled with poor personal financial management can lead you to make poor decisions. Avoid the cash flow blues by putting these principals into place in your firm.
Pick one day each month and schedule a portion of it to review and get out your billing statements, putting the block of time on your calendar well in advance. Except for court-ordered appearances, treat this block of time as if it were a client meeting that should not be canceled or re-scheduled. All of your bills should be reviewed and finalized as efficiently as possible. (Avoid interruptions and distractions!) Keep track of the amount of time that it takes you to complete the task.
How to Bill for Your Services
Although you are a professional utilizing your training and special skills to help your clients in ways that they cannot help themselves, at the end of the day, you run a business. Your business cannot survive without collecting legal fees.
There are various methods that can be used to determine your fees, with hourly billing, flat fees, and contingency fees being the most frequently used mechanisms. While certain fee arrangements lend themselves better to certain areas of the law, and some cannot be used with regard to certain matters, there is one overriding concept set forth in Rule 1.5 of the Rules of Professional Conduct that is applicable regardless of the mechanism you use to set your fees: A lawyer shall not make an agreement for, charge, or collect an unreasonable fee. The Rule provides the following non-exclusive ten factors to consider in determining the reasonableness of a fee:
(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
(3) the fee customarily charged in the locality for similar legal services;
(4) the amount involved and the results obtained;
(5) the time limitations imposed by the client or by the circumstances;
(6) the nature and length of the professional relationship with the client;
(7) the experience, reputation, and ability of the lawyer or lawyers performing the services;
(8) whether the fee is fixed or contingent;
(9) prior advertisements or statements by the lawyer with respect to the fees the lawyer charges; and
(10) whether the fee agreement is in writing.
You should always be prepared to justify the reasonableness of your fee in each case, period.
Regardless of the fee structure, there are three fee-related issues that should always be addressed in your retainer agreement:
1. The scope of your representation. If it is a criminal matter, does the fee cover General Sessions and Circuit Court, or is the representation limited to General Sessions Court? Will there be an additional fee if there is a jury trial? Does your representation include a retrial or appeal? What about probation violations? If it is an uncontested divorce that becomes contested, is there an additional fee, or does it convert to hourly? If it is a collections matter in General Sessions, are you agreeing to make only one appearance? Addressing these matters on the front end will help ensure that you and your clients both understand the fee structure.
2. Whether or not the fee is refundable or nonrefundable. Nonrefundable fees are paid in advance and earned by the attorney when paid. Such fees are permissible; however, nonrefundable fees are subject to the reasonableness standard referenced above and must be agreed to in a writing, signed by the client, that explains the intent of the parties as to the nature and the amount of the nonrefundable fee.
A sample of this written intent is as follows:
This retainer is considered fully earned upon receipt and is to compensate this firm for being available to represent you, for committing time for this representation which has precluded the acceptance of other employment, and/or from being precluded from taking an adversary interest or position in this matter.
Remember that if any fee is refundable or partially refundable, any unearned portion (which still belongs to the client) must be kept in a separate account from the earned portion (which belongs to you) in order to avoid comingling your funds with client funds in violation of RPC 1.15.
3. Expenses. Be sure to specify that expenses are not included in your fees, and that the client agrees to separately pay for expenses.
A sample of this is as follows:
You also agree to separately pay for any necessary expenses, such as travel expenses, filing fees, court costs, copy expense, fees for private investigators, expert witnesses, court reporter charges, transcripts, or other expenses which the Attorney considers necessary for proper preparation and administration of this case, which will be passed through to you and billed at cost. Mailing and shipping charges are billed to you at cost. We do not charge for messenger service within walking distance of our offices, but other local deliveries are charged at $.50 per mile.
Examples of Fee Arrangements
• Initial Retainer/Hourly Billing
Hourly billing is appropriate for many matters, especially when it is difficult or impossible to determine the amount of time that will be required. Generally, the client will pay an agreed initial retainer at the initiation of representation. This initial retainer may be either refundable or nonrefundable; however, remember that if the initial retainer is not designated as nonrefundable, any unearned portion must be kept in a separate account from your funds. You are strongly encouraged to obtain a retainer at the commencement of representation which is designed to cover your expected fees for the matter being undertaken as it is far more difficult to obtain prompt payment from a client at the conclusion of a case. You are almost universally better off not to take on a case when a client cannot pay your retainer (unless you are handling a matter pro bono, of course). You should also be very careful about deciding whether to allow a client to make payments toward their retainer after you commence work rather than requiring it all up front.
Most attorneys bill against the initial retainer at the attorney’s hourly rate or, if the retainer is nonrefundable and considered earned, will give the client a credit for the amount of the initial retainer against the attorney’s hourly billing. In either event, the retainer agreement should explain the procedure once the attorney’s billing exceeds the initial retainer. Will an additional retainer be required, or will the client be billed monthly after the fees have been earned?
Also be sure to address billing increments, such as one tenth (.10) of an hour. If you have certain minimum hourly charges, such as .2 for a telephone call or a two (2) hour minimum charge for a court appearance due to scheduling priority, be sure to include this in your retainer agreement.
• If you write down your time on a time sheet form, keep the time sheet form or slip on your desk as a reminder to record your time.
• Record all time for all services – telephone calls, file review, client meetings, research, drafting of correspondence, etc. You can decide later if you want to bill for that time. Remember, your time and your advice are what you have to offer, so do not unintentionally give it away because of poor recordkeeping.
• Record time contemporaneously as you complete a task. You will not remember all the work performed at the end of the month, week or day!
• Before starting a task, mark your starting time and the name of the client and matter on your time sheet. When you stop, mark the stopping time and the description of the work performed. An automated system will likely allow you to start and stop a time clock on several client screens and then remind you to make the appropriate time entries before closing out each client’s account screen. This is particularly helpful in practices where the attorney works with a number of client files during the day.
• Record non-billable time for firm administration, CLE, marketing, recruiting, pro-bono, bar service and other non-client, but practice-related activities. Recording this time provides you the information needed to better manage all of your time, in addition to make it more likely that you will remember to record the billable time.
• Review time records at the end of the day and add up all billable and non-billable time to be sure you have not failed to record all of your time for the day.
• Enter all time records into the client billing system daily. Whether your “system” is a word-processing document or a time and billing software system, entering it daily and backing up those files will ensure that you will not lose that time.
• Keep all time records in case they are needed for evidence to support your fee or to assist with malpractice claims or disciplinary complaints.
• Automate your time-keeping and client billing function using legal-specific time and billing software. An automated time and billing system reduces the administrative time required to record, process and bill attorney time. It also provides management information to help in the management of work-in-process, accounts receivable, practice profitability and attorney and paralegal productivity.
• Send each hourly billed client an invoice monthly, even if the client has a positive balance from their initial retainer. This will allow the client to see exactly what fees have been expended for and how much retainer credit remains.
• Contingency Fees
A fee that is contingent on the outcome of the matter for which the service is rendered is permissible (provided it is reasonable) EXCEPT for the following matters, in which a contingency fee is PROHIBITED:
1. 1. Domestic relations matters where the payment or amount is contingent upon securing a divorce or the award of custodial rights, or upon the amount of alimony or support, value of property division or settlement, unless the matter relates solely to the collection of arrearages in alimony or support, or the enforcement of an order diving the marital estate, and the fee arrangement is disclosed to the court;
2. Representing a defendant in a criminal case
Any contingent fee agreement must be in a writing signed by the client and shall state the method by which the fee is to be determined, including the percentage (or percentages) that shall accrue to the lawyer in the event of a settlement, trial, or appeal; the litigation and other expenses to be deducted from the recovery, and whether such expenses are to be deducted before or after the contingent fee is calculated. The agreement must clearly notify the client of any expenses for which the client will be notified whether or not the client is the prevailing party. Upon the conclusion of a continent fee matter, the attorney shall provide the client with a written statement stating the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination.
There are statutory percentage caps on attorneys fees in medical malpractice actions (limited to 33 1/3 % by T.C.A. § 29-26-120) and workers’ compensation cases (limited to 20% by T.C.A. § 50-6-226). Likewise, federal law imposes fee caps in Social Security Cases (42 U.S.C. §§ 406(a)(2)(A)).
Also note that when representing a minor, a contingency fee agreement between an attorney and minor’s next friend is not binding, and a court must make findings concerning the ten factors set forth in RPC 1.5 in determining a “reasonable fee” for the attorney’s services representing the minor client. Wright ex rel. Wright v. Wright, 337 S.W.3d 166 (Tenn. 2011).
• Flat Fee
Some matters, such as criminal defense cases, uncontested divorces, appearances in general sessions court for collections cases, etc., are often handled based upon a flat fee agreement. Determining the appropriate fee can be a challenge, as you need to be able to accurately estimate the amount of your time the representation will likely require; however, some clients prefer flat fees because they do not receive mounting bills each month for your services. Also note that if a flat fee is not expressly agreed to be nonrefundable, it may be difficult to determine the portion of the fee earned (if any) should representation be terminated prior to the matter’s conclusion.
• Fees for Consultations
You should carefully consider whether to charge a fee for an initial consultation with potential clients. As a general rule, there is no consultation fee charged when meeting with a potential client who has a criminal law issue or a personal injury matter. On the other hand, be very careful about providing free consultations as it relates to domestic relations and juvenile court matters. Many times, people may have no means of hiring you and are simply looking for free legal advice. Additionally, be weary of phone consultations for the same reason. It is far better for your staff to conduct some initial screening of potential clients, if at all possible. If you are the one who is conducting the initial screening, be quick to advise what your expected fee might be, and the required arrangements before bringing the client into your office.
Accepting Credit Cards
There are numerous options that will permit you to accept credit cards for payments. As you examine your options, be sure to consider equipment costs, fees, and long-term contracts. The law has also now changed such that you may be permitted to pass along the transaction fee that you incur
TBA MEMBER BENEFIT ALERT
As a benefit of your membership, the Tennessee Bar Association has partnered with LAWPAY to provide special discounts and incentives to TBA members. For more information on LawPay's services for TBA members contact LAWPAY.
Trust Accounting and Other Ethical Issues in Finance/Accounting
One of the fastest ways to commit an ethical violation is a failure to properly maintain your trust accounting -- Interest On Lawyers' Trust Accounts (IOLTA). Because the funds in your IOLTA account are not yours, it is absolutely imperative under TRPC Rule 1.15 that you accurately maintain this account. In fact, in order to participate in the IOLTA trust program, your bank must agree to report directly to the Board of Professional Responsibility any overdraft and/or dishonored instruments written from your IOLTA account.
Fortunately, the Board of Professional Responsibility has issued a Formal Ethics Opinion that gives a step by step explanation of proper trust accounting. It is also crucial that you never, under any circumstances, deposit money that belongs to your client into your personal or operating accounts!
Trust Accounting Guide
To assist with trust accounting, the Tennessee Bar Association has developed a guide for trust accounting procedures:
• Prepare Trust Account Deposit Form (See form TRUST-R).
• Post deposit to client’s Trust Transaction Form (which is maintained in the client file).
• Trust account deposit form and check (or cash) are submitted for deposit to the firm’s trust account.
• Prepare receipt voucher for client (if cash).
• Prepare Client Ledger for client/matter.
• Post deposit to Client Ledger and (bank) trust account journal and update balances.
• Complete deposit slip for bank and deposit check on date of receipt.
• Copy deposit slips and check prior to making the bank deposit.
• Issue a check requisition (See form Trust-D).
• Pull client’s ledger card. Check to see:
• If there is a sufficient balance in client’s account
• When the client’s check was deposited into the Trust Account. If there has not been sufficient time after a deposit for the check to clear the bank, a check should not be issued until the deposit check has cleared.
• Once funds have been confirmed as available, prepare check.
• Present check to requesting attorney or managing partner or person authorized on signatory cards.
• As authorized signatory, review client’s ledger card to assure all transactions have been recorded and are correct and to confirm sufficient balance of account to fund disbursement.
• As authorized signatory, sign check.
• Record the amount of the check on the client’s ledger card and the firm’s (bank) trust account journal. Record check on the client’s Trust Transaction Form (which is maintained in the client’s file). Update balances.
• Prepare correspondence to client informing client of trust account transaction.
• Reconcile the firm’s (bank) trust account journal and cash receipt book to bank statement monthly.
• Reconcile Client Ledger balances to cash receipt book and bank statement monthly.
• At month-end, reconcile Client Ledger sheet for each client with the client’s trust transaction form maintained in the client file and then filed in the client file.
The Tennessee Bar Foundation administers Tennessee's IOLTA program and offer resources for both lawyers and bankers. More information can be found here -- FAQ, eligible financial institutes, forms, rules, guidelines, and requirements.