We all know the expression, "He's penny-wise and pound-foolish," and we understand its meaning, even though for most of us, its origins are shrouded in the mists of time. The maxim refers to people who make foolish financial decisions. Could it refer to your Company, too?
A little puttering on the Internet reveals that the source of the "pound- foolish" maxim is an old English fable about a man who was too cheap to have his horse reshoe when a shoe became loose. As a result, a rock became lodged between the loose shoe and the horse's hoof. First the horse became lame, then it stumbled and broke its leg, and in the end it had to be shot.
Thus, while the owner saved the price of the blacksmith's services, he lost the much greater value of the use of his horse. Penny-wise, but pound-foolish he truly was.
So what can loose horse shoes teach us about company’s finance? More than you might initially think—especially if the Managers in your firm don't understand the difference between cutting costs and raising revenue.
Budgeting
Every firm needs a written budget and should consult that budget periodically to make sure that expenses are within expected limits. Unfortunately, more often than not, firms don't have written budgets based on well-reasoned projections of what expenditures will be needed to operate the firm.
Consequently, when revenue is flat or declines for one or more accounting periods, here's what happens: Panic sets in, and because the projections were inaccurate, it sends the firm's employees scrambling outside of the budget and into a cost-cutting frenzy, slashing spending on everything from pen pencils to technology upgrades.
And so when revenues or profit margins in a law firm decrease, the manager’s natural impulse is to attempt to reduce the various costs that go into providing a particular service, either directly or indirectly. But, like the hapless owner of the horse in the fable, firms that concentrate on reducing expenses rather than focusing on effective ways to increase revenue will find that, instead of riding high, they're walking unhappily—and sometimes sooner rather than later.
Leave Expenses Alone
Firms that really want to improve their profitability should be looking for ways to increase their revenues while keeping their expense structures unchanged—or at least growing as slowly as possible. So your focus should be on Sales but not on the cutting cost to increase your bottom line.
Where you can boost Company’s Revenue ?
Realization - The first place you can look to gain additional revenue is in your realization rates—both billing realization rates and collection realization rates. You can almost always find additional time (and profits) by improving your billing realization, which you do by reducing the number of hours worked on a given matter but not billed to that matter. Improving your collection realization requires reducing the number of hours billed to a matter but not collected—either through write-downs of time recorded or write-offs of unpaid accounts.
Leverage and work for higher rates - A second place to look for additional revenue is through increasing personnel leverage. If, for example, you can hire an associate to do billable hourly work that you have been doing yourself, you can not only bill that person's time but also free up your time for other, higher-hourly rate work.
Alternative Billing - A third, and perhaps less obvious, option for adding revenue is through the implementation of alternative billing in tandem with increased use of technology. You should charge according to Geography and type of work. You will then be guaranteed to make a greater profit on these files over the long term.
Plus, there are other benefits. When you can tell clients up front what they will be charged for the matter, before heading into the work, it increases their feeling of comfort with you. Not only that, but because you have quoted a fixed fee, you and your staff now have every incentive to look for new ways to use technology to perform the work with the same accuracy but in a more efficient way—further increasing the profit margin on the work.
This is a win-win for you, the client and the bottom line.
Billing turnover - A final place to seek increased revenue is in your billing turnover rates. How long does it take for you to produce a bill once the work is done? The average billing turnover time—meaning the time work-in-progress is banked before a statement is sent to the client—is 60 to 70 days. If you can decrease that time, you will increase your billing turnover rate. You will also reduce the number of days before payment is received (which is, on average, 105 days), thereby increasing your payment turnover and increasing the speed with which revenue flows through the firm.
A little puttering on the Internet reveals that the source of the "pound- foolish" maxim is an old English fable about a man who was too cheap to have his horse reshoe when a shoe became loose. As a result, a rock became lodged between the loose shoe and the horse's hoof. First the horse became lame, then it stumbled and broke its leg, and in the end it had to be shot.
Thus, while the owner saved the price of the blacksmith's services, he lost the much greater value of the use of his horse. Penny-wise, but pound-foolish he truly was.
So what can loose horse shoes teach us about company’s finance? More than you might initially think—especially if the Managers in your firm don't understand the difference between cutting costs and raising revenue.
Budgeting
Every firm needs a written budget and should consult that budget periodically to make sure that expenses are within expected limits. Unfortunately, more often than not, firms don't have written budgets based on well-reasoned projections of what expenditures will be needed to operate the firm.
Consequently, when revenue is flat or declines for one or more accounting periods, here's what happens: Panic sets in, and because the projections were inaccurate, it sends the firm's employees scrambling outside of the budget and into a cost-cutting frenzy, slashing spending on everything from pen pencils to technology upgrades.
And so when revenues or profit margins in a law firm decrease, the manager’s natural impulse is to attempt to reduce the various costs that go into providing a particular service, either directly or indirectly. But, like the hapless owner of the horse in the fable, firms that concentrate on reducing expenses rather than focusing on effective ways to increase revenue will find that, instead of riding high, they're walking unhappily—and sometimes sooner rather than later.
Leave Expenses Alone
Firms that really want to improve their profitability should be looking for ways to increase their revenues while keeping their expense structures unchanged—or at least growing as slowly as possible. So your focus should be on Sales but not on the cutting cost to increase your bottom line.
Where you can boost Company’s Revenue ?
Realization - The first place you can look to gain additional revenue is in your realization rates—both billing realization rates and collection realization rates. You can almost always find additional time (and profits) by improving your billing realization, which you do by reducing the number of hours worked on a given matter but not billed to that matter. Improving your collection realization requires reducing the number of hours billed to a matter but not collected—either through write-downs of time recorded or write-offs of unpaid accounts.
Leverage and work for higher rates - A second place to look for additional revenue is through increasing personnel leverage. If, for example, you can hire an associate to do billable hourly work that you have been doing yourself, you can not only bill that person's time but also free up your time for other, higher-hourly rate work.
Alternative Billing - A third, and perhaps less obvious, option for adding revenue is through the implementation of alternative billing in tandem with increased use of technology. You should charge according to Geography and type of work. You will then be guaranteed to make a greater profit on these files over the long term.
Plus, there are other benefits. When you can tell clients up front what they will be charged for the matter, before heading into the work, it increases their feeling of comfort with you. Not only that, but because you have quoted a fixed fee, you and your staff now have every incentive to look for new ways to use technology to perform the work with the same accuracy but in a more efficient way—further increasing the profit margin on the work.
This is a win-win for you, the client and the bottom line.
Billing turnover - A final place to seek increased revenue is in your billing turnover rates. How long does it take for you to produce a bill once the work is done? The average billing turnover time—meaning the time work-in-progress is banked before a statement is sent to the client—is 60 to 70 days. If you can decrease that time, you will increase your billing turnover rate. You will also reduce the number of days before payment is received (which is, on average, 105 days), thereby increasing your payment turnover and increasing the speed with which revenue flows through the firm.
