Business

Many, perhaps most, lawyers think that they know how to be business people. They have never actually studied business, or finance, or management, or economics — in college they were busy with Political Science and Pre-Law — but they have, they figure, learned them all by osmosis working with business clients. After all, how hard can it be? Doctors, of course, subscribe to the same theory; they are quite sure, after working with lawyers, that they know at least as much about law as we do. After all, how hard can it be?

But if you wouldn’t want a lawyer taking out your appendix or a doctor negotiating your plea bargain then you admit the possibility that maybe, just maybe, there is more to this business stuff than you thought. The problem, of course, is that despite our ignorance many of us have to run, or participate in the running of, our law businesses. In order to assist in that effort Bryce Wilson has at great expense consulted leading business and management experts in order to pass their wisdom along to you. In this issue we examine a few basic management and monetary yardsticks that will help you measure the efficiency and financial health of your business.

The usual caveats apply: these are rules of thumb, they may not all apply to your particular situation, consult with your own advisers (yeah, right, as if you’d need this article if you had advisers).

The assets/receivables ratio, for example, indicates how much of your assets are tied up in money you don’t have. Some say that if your assets are under $250,000 then your ratio should be about 20%; if your assets are $250,000-$500.000 they say 35%; if $500,000- $1,000,000 then 40%; and if your assets are over $1,000,000, why are you reading this article?

Turnover ratio (TR) is how often you receivables “turn over.” A good theoretical rate for a small firm is a number in the several hundreds. Handling only a few, large cases will bring the number way down. If the number is too low, “turnover” is what happens to your staff as you hunt for people who don’t really want to be paid and will work for the pure joy of it, or else it’s what you do carefully with the pages of the help-wanted section.

There are many other such ratios. Due to space limitations the above descriptions are very simple, even simplistic; the point of this article in mentioning then is simply to illustrate that they exist. It truly can be helpful in running a business to buy a book and learn about them, rather than to do things by the seat of your pants.

The real purpose of this article is to inform you of other, less well-known guidelines that you may not see discussed in the books available at your local Target. These are based not only on the accumulated knowledge of experienced practitioners but also on precise mathematical calculation, so that you need not merely follow blindly in the steps of those who have gone before — a good many of whom have, a wise man once pointed out, fallen off the edge.

The cash-trash ratio (CTR) compares the value of the legal tender in the petty cash drawer to the quantity of old keys, empty gum wrappers, rubber bands, rubber checks, and I.O.U.s in there. Obviously, the best ratio is infinitely positive — i.e., no trash — and the worst infinitely negative — i.e., no money. The CTR can be a measure of many things, including corporate solvency, employee honesty, effectiveness of management controls, and the number of days until the next payday. One might say, then, that low CTR doesn’t specifically indicate anything. Good businesspeople such as yourself, however, know that the glass is half-full, not half-empty: low CTR is evidence of anything you want. Since you work hard the problem must be that the ugly secretary (yes, that one; no, not the young blonde) is embezzling, or that your partners are taking beer money from petty cash again. (Sure, you took a little bit out the last time Power Ball got over $30 million — but you paid that back long ago, probably; and anyhow, you work harder than the others so its Really Your Money, isn’t it?).

The Stranger Index (SI) is the per-Capita number of people walking your hallways that you don’t know who the hell they are. It is an indication of management efficiency. The scale runs from zero to one; one means that you know everybody, zero means that everybody is a stranger (to make the math easy, we exclude you from the calculation). So, if you employ 40 people in your office and don’t recognize two of them, the Stranger Index is 0.95. That number is a lot better than average. Intuitively, SI should vary depending on the size of the office, i.e., in a large office many people will be strangers; statistics and experience show, however, that in offices of more than eight people at least one of them won't know who anybody is.

The money mail formula (MMF) measures, basically, how much of your mail is junk. It determines whether your mail makes you money or costs you money. The formula is as follows:

MMF = R/C/2+vT

where R is incoming mail that represents potential revenue to you (correspondence, pleadings, new cases, bill payments, settlement drafts, etc.), C is incoming mail that costs you money (bills, Bar dues, income tax notices, catalogs you order stuff out of, etc.) and T is book flyers, CLE ads, payroll tax notices, Arizona Lawyer, catalogs you don’t order stuff out of but got on the mailing list for reasons you don’t know but they all misspell your name in slightly the same way, and all the other mail you throw away without reading. For purposes of the calculation, the value of each item is found by weighing each stack on the postage meter (Some MMF issues are unresolved. For example, is the monthly invoice from the chiropractor you pay to run cases to you a revenue item or simply a bill? Expect a letter opinion on this one from the National Accounting Standards Board by March — at least that’s what they promised our accountant.) If your MMF significantly exceeds one, you are probably in good shape; if it is somewhere around one, your business needs improvement but you should be able to survive for awhile; if it is below one, stop the mail.