Episode 6: The Most Important Financial Tips Every Law Firm Needs to Master

You might think that simply being a good lawyer is enough to make your law firm successful, but the truth is a bit more complex. Whether you think of your firm as a business or not, it is. And finances play a crucial role in helping any business or legal practice succeed.

In this episode of Championing Justice, personal injury attorney Darl Champion sits down with legal financial consultant John Guzowski to discuss the most important finance advice every law firm should know.

Learn more about John here, or email him directly at: john@accountCFO.com

Watch this and other Championing Justice episodes on YouTube: Championing Justice video episodes

Additional Resources:

Learn more about The Champion Firm, Personal Injury Attorneys, P.C. here.

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Transcript

Thank you for listening to the Championing Justice Podcast.

Today, we have John Guzowski here to talk about finance and business issues for law firm owners.

Thanks for joining us, John. 

Happy to be here.

John, tell us a little bit about what you do with your current job and what you can do to help law firm owners.

My wife always cringes when she gets that question because I don't ever usually do just one thing.

But as far as it relates to law firms or plaintiff firms, currently my firm offers fractional CFO services to a select group of law firms.

And that just comes from almost 20 years of working with plaintiff firms.

And both doing accounting as well as helping with operations.

And in some cases, being the CFO.

My business partner, who's also a CPA, has spent time at a couple firms as a CFO.

So we've had lots of experiences.

How did you get into the law firm industry?

Well, I guess law firm industry in general, but also personal injury in particular, because it sounds like that's your specialty.

That's also a very interesting winding road from-

Let's hear it.

From leaving public accounting in my 20s and jumping into the venture capital world of startups and raising money and really enjoying medical device and biotech and technology.

Never really anticipated that I would end up, this is not anything that was ever on my radar screen of what I would end up being the niche that I worked so closely with.

Yeah, I imagine most people don't go to CPA school thinking, I want to be the CFO for plaintiff personal injury firms.

It just sort of happens.

So, after raising a lot of money for various startups back in the late 90s and taking the company public, I was 29 and had this fantasy net worth with options and stuff of about $9 million.

So, I thought I was done, it all worked out, and then everything blew up and there was nothing.

So, I decided I didn't want to take equity anymore in businesses or really raise money for people.

So, I just started working with closely held businesses, businesses who were under $10 million in revenue that I felt that I could help increase the revenue and grow because they were usually it would be like family businesses or just people who just lacked the sophistication within the businesses.

So, during that time, I started Abacus Advisors where we offered outsourced bookkeeping and payroll and consulting CFO work for these types of businesses.

And along the way, I ended up working for a client that was a medical doctor who had lots of various interests and ultimately convinced me to go full time.

And I spent 10 years with him, growing that business.

And I always kept Abacus going on the side.

My father, who's 83, still worked for me the whole time.

He was a retired CFO.

And so he did a lot of the bookkeeping and he actually still works for Abacus today.

Now did Abacus, when you started Abacus, did it start out focused on law firms?

No, it was just, it had some medical practices and some interesting business within the medical community, some workers comp billing, that type of stuff.

But while working for this medical practice, that practice started getting into doing personal injury.

Therefore, there was some introductions to some law firms.

And I was just asked to meet with a lawyer one day and see if my dad and I could help them out with their business.

Well.

And that was when you realized there's an incredible need in the personal injury industry because we know nothing about finance.

So I started considering doctors or lawyers.

Well, medicine is difficult and the reimbursements were going down and equal challenges in the business understanding and how business principles were applied.

And I enjoyed the first few that I worked with.

And just really didn't try to build it, but when I left the medical practice, 25 of my 40 clients were playing the firms.

So I went to the whole, you should have a niche.

So, okay, this is gonna be the niche.

And we started growing it.

And just like I met you, just through one firm introduced me to another firm, introduced me to another firm.

And when I sold the business a couple of years ago, we had 250 clients.

And so you're no longer with Abacus, but you have a separate entity or business that you've created where you provide this fractional CFO work for, is it just law firm owners?

Pretty much just law firms.

The whole plaintiff industry has provided a lot of opportunities in the finance side of things.

So we do some work for some of the different finance companies, whether it's medical funding or other type of stuff, both running those businesses.

I operate a couple finance businesses in the plaintiff industry, as well as we're doing some CFO work for some entities that are not law firms, but they're still connected to the industry.

So let's get into talking about finance and business issues, because this is something that a lot of lawyers ask me about.

And I think there has long been a belief that just being a good lawyer is good enough.

I'll just be really good at practicing law and things will happen.

Maybe that worked 30, 40 years ago.

It seems like the industry has changed a lot over the last 10 years or so.

And I've been exclusively handling personal injury cases since 2010.

And just in that time, it seems like it's changed a lot over 13 years.

But how is finance different for law firm owners in the personal injury space than say maybe a traditional business, whether it's a medical practice or an accounting firm or some other professional industry?

So it's important, of course, to recognize that your law firm is a business, which a lot of lawyers don't.

But also a lot of doctors don't, and a lot of other business people don't think of the business aspect of what their business really is.

The difference though is medical practices, traditional retail businesses, even law firms that bill by the hour, there's a lot of similarities and just kind of the business rules or approaches that you would apply.

Plaintiff with contingency fees just adds a whole different animal, which can be really, really good.

And if you are good at getting large settlements, or you do find really good cases, you're able to, a lot of mistakes are covered up.

While at the same time, if you are running a high-volume pre-settlement practice, there's a lot less latitude for mistakes.

You have to maximize those cases, or you're not gonna be able to keep up with the dollars that it costs to maintain the referrals coming in and the staff required to work through it.

So there's just a huge continuum within it.

So therefore, the information that, and also a lot of the information or a lot of the strategy or a lot of running these businesses is actually pretty squishy.

So relies on experience and intuition and deciding what you wanna be.

And some folks want to be the high volume pre-settlement.

Some people want to be the boutique, eight figure only firm.

And then others strategically like to have the continuum.

And so the important thing that I see with the contingency practices that, from a business standpoint, from a finance standpoint, is the things that are solid, the numbers that you do know, you need to make sure that they're right and that they're really right and you need to understand them because there's so much unknowns in between that you have to interpret to make those decisions.

What are some of those knowns that law firm owners need to know about when they're looking at their books?

Sure.

Well, first and foremost, the books have to be accurate, which means my practices or what I advise people to do is they need to be reconciled every month.

And it's not just the bank account.

You have to make sure that credit cards and other things that feed into a business, including how you're recording payroll, is all done accurately.

Classification is also important of your expenses so that you really do know how you're spending.

And the realization that case costs are not really expenses.

They impact your cash flow, but you're effectively loaning the money to the case.

So you're setting up a receivable or an asset.

But even, I think the biggest risk to firms, other than not keeping all their books or all the accounts really reconciled, is not treating the IELTA account with the respect you're supposed to.

Sure.

Understanding Rule 115 is super, super important.

And the amount of firms that I have encountered over the years that have challenges is amazing to me.

Right.

And it's really not that hard to keep it squeaky clean.

Yeah.

So you're talking about ensuring that you're not commingling funds, right?

Ensuring that what goes into the IELTA account is accurately tracked, the settlement disbursements are accurate.

In terms of, you know, one question I get asked a lot is, you know, should you have a policy for once the check goes into the IELTA, like a delay period before you disperse?

Do you have a general rule of thumb for that?

So it's been interesting.

A lot of the answers that I have to a lot of these questions are either things that I've experienced personally or what I've seen in many firms.

So they're best practices according to John.

So there's not really a...

So you have a risk, right?

If a deposit goes into an IELTA account and for some reason it doesn't clear.

Or gets reversed.

Or gets reversed.

Yeah, especially if you allow things to go in through ACH.

So with ACH, things can actually be reversed for a certain period of time after they actually go in.

Wires typically can't, but if checks, you have that risk, right?

It takes...

I've been told from various bankers it can take 10 days to actually clear the Fed.

So there are firms that have a policy that they will wait 10 business days from the point they make the deposit before they'll distribute any of the funds.

So that can be a little bit inconvenient, especially if you have a client who knows their money and they really want to get paid out.

And may have a serious financial need.

Sure.

And a lot of times the firm has a serious financial need and needs the working capital.

So I've asked some compliance attorneys about this just to help interpret the rules and what they think is best.

And most of them, their answers are based off how liquid the firm is from an operation standpoint, because my understanding is that it is perfectly fine if you do disperse and the deposit is reversed, and you have the ability to cover that by putting the money back in to the IOLTA account from operating or from some other means, then that's an appropriate remedy to that happening.

But if you're talking a $2 million settlement check that gets reversed, you may not have those kinds of assets to fix it.

So I see that the decision being, any type of policy tends to be inconsistently applied because they're considering the insurance company, they're considering the amount.

So like for example, if it's a bunch of insurance company checks that are under $50,000 and the company has some liquidity, or at least the partners have access to capital to, they'll just go ahead and, they'll deposit and disperse the same day.

We've heard different things from different bankers.

Sometimes it depends on the amount of the check, but we definitely have a policy.

I don't think it's 10 days of just kind of waiting.

And it does depend on the size of the check for a variety of reasons.

One of the things that I wanted to talk a little bit about was when I was starting my firm, I didn't have a lot of money in the bank.

And so I was in survival mode, as I've always said, where it's like, I just gotta get cases.

And one of the things I didn't realize was that I could actually get a credit line.

Like I went and had lunch with somebody, I went to law school with them, and they're like, you should talk to this banker, it's the bank we've been with the entire time, and they'll give you credit line.

I'm like, why would they give me a credit line?

They're like, I don't have anything.

And they're like, well, it's your cases.

Like the cases you're taking with you can be the basis of a credit line.

I got a $75,000 credit line, and I thought it was like the most money in the world.

I'm like, oh my gosh, this is great.

I had the $75,000 cushion.

And a lot of lawyers don't understand that.

And the other thing I found is a lot of lawyers don't use their credit line.

They don't use it for case expenses, they don't use it for anything.

So let me start off by asking, do you recommend that plaintiffs have a credit line?

And if so, how much should they have?

And how do they determine how much they need?

There's a lot of ways to start this answer.

First of all, it's a lot easier to get a credit line when you don't need the money.

So for example, let's exclude when you're starting the firm.

We'll talk about that in a minute.

But if you are having a really good year and you don't have a credit line, apply for one because it costs very little to have a half million dollar credit line and not use it as opposed to when you only have three months of money left and you have no case that's gonna settle till the following year, it's gonna be a heck of a lot harder to go to the bank and ask them for that credit line.

Traditional lines of credit through banks are challenging at some banks and easier at other banks.

And it all comes down to the banker's knowledge or the institution's knowledge of contingency firms.

So therefore, not all large banks are friendly to plaintiff firms.

Some are, but a lot of the community banks, if they have a niche in that area, can get to a point where they can take some risk with it.

So we talk about the case list, and the case list is the most valuable asset that a law firm has.

It's basically like accounts receivable, right?

Yeah, but it's not on your books.

Okay, because it doesn't fit the accounting criteria of being measurable and knowing the time period in which you're going to collect it.

But somebody with some experience can evaluate a case list and say, this is worth at least 20 million.

It could be worth 50 million, but it's worth 20 million.

So although banks can't necessarily, because of certain regulatory rules, can and won't take that as collateral, it's definitely something that they can feel some comfort of how collectible their line of credit is going to be.

So they have to base it on other things, especially when you start out.

They're going to look at your cases and they may not even have a lot of history with you.

So they're going to rely somewhat on your personal assets.

And many won't encumber specific personal assets, but they're always going to ask for personal guarantee.

I don't care if you do $50 million a year in revenue and you go get a line of credit, they're still going to ask for a personal guarantee.

And a lot of people are against personal guarantees.

And quite frankly, I don't really understand why it's, if you're going to ask somebody to take a risk on your business, why won't you also take the risk on the business?

So, specifically, there's an opportunity to look for banks that will, that understand plaintiff, the plaintiff world, both at the beginning and when you're running the business or have several years under your belt.

I'm a big advocate of using lines of credit.

It made a whole lot more sense when interest rates were three and four and 5%.

However, you have to consider what the alternative is.

The plaintiff firm can be a giant roller coaster.

And if you don't have substantial savings that you leave in the firm or that you take out of the firm, but you're willing to put back into the firm, then a line of credit is an awfully nice safety net when you're trying to evaluate how long can you endure with no revenue coming in.

So I like to see lines of credit used for two different things.

And some people are even able to have two separate lines of credit so they can be segregated.

One being a working capital line of credit, the other being one for case costs.

Case costs.

And that's what we do.

We have two separate lines.

Some smart person probably advised you to do that.

Probably.

So therefore, you can, instead of using your own money, your own after-tax money to finance the case costs, you use the bank's money.

And interest accrues, and you just pay the interest.

And that's just a cost of doing it.

Some states allow the lawyer to pass the interest on to the client.

You just have to be really careful that your state allows it and that your engagement letter or retainer agreement, whatever you call it.

And you're doing it right.

Allows you to do it.

Yeah, we don't do it for a few reasons.

One, I've always felt like it's kind of, you know, I don't want a client to feel nickel and dimed.

And I felt like the goodwill that I'm able to build with a client, the value of that far exceeds whatever I'd recoup in interest when they see that interest item.

The other thing, you know, when I started my firm and just didn't have a lot of people, I'm like, this would be a pain in the butt to do it.

It is difficult.

And so I'm like, I'm just not gonna do it.

But how do you determine how much to have?

Like what's the ratio?

And, you know, for example, let's say that at any given time, you have $750,000 in case expenses outstanding.

And let's say your monthly overhead's, you know, $250,000, $300,000 a month.

How do you determine, okay, what should, how should my credit line correlate to those two figures?

Like with most answers, you're gonna, you will ask me, it depends.

It's very, very important, I think, with lines of credit in general, to get as much as the bank will let you have, because not using it is not that expensive, but having it can be exceedingly valuable.

So for example, if many firms that start off will get under 100, but then after a couple years of operating, they'll get up to 250, and then they'll get up to 500.

I see no problem with having a half million dollar to a million dollar line of credit that you never use from a working capital standpoint, because it is there.

It can give you a lot of peace of mind.

On the client cost side, you just have to look at your client cost volume over time, and where you're taking the firm as far as growth, and do your best to predict what you're going to need it for.

And remember that it's not always just growing as you're settling, it's also going down.

Yeah, I mean, ours is more like this, and over time, it's gone up because the size of the cases that we've handled has gone up, the complexity of them.

We've started handling more medical malpractice cases.

Those are very, very expense-heavy cases.

But then, if your biggest case has, we've had cases with $250,000 in case expenses, well, all of a sudden that comes in, boom, you can pay that down, but then it quickly goes back up on the next case.

But I have found that it is best to ask for the money when you don't need it.

Typically, we've only tapped into our expense credit line because I have realized that it makes zero sense to be using cash to fund your case expenses, your own cash, especially because of the tax disadvantage that you already have, that you are getting revenue that's going out, you're paying taxes on that revenue, and then you don't have the money either.

It's like a double whammy.

So I strongly advise people to use that credit line for case expenses.

The one challenge that I see too when we talk about credit lines and how's the lawyer planning for things is how are you paying your taxes?

How are you planning for that?

And it is so unpredictable.

And I've had time, I mean, I think last year we overpaid a ton of money in taxes and it's like, wait, why did we do that?

I would rather underpay than overpay because even the years that we've underpaid, I've never had a penalty.

There's always some safe harbor and I don't know all the tax rules, but there's some thing that happens that we don't have to pay a penalty.

How do you advise law firm owners on tax planning?

I chuckle because my father was the one who worked with the first 30 firms very closely and would be asked those questions.

And even to this day, many of those lawyers, I'd love to mention, but it would not be appropriate, still listen to what Frank told them to do, which was take 20, 25% of every legal fee that comes in and put it in a savings account.

So that when your CPA tells you how much you have to pay, but you're quarterly or whatever, that you have the money.

So, and those that have followed it are really, really, really happy because they just don't deal with surprises.

However, you also, that money is then not being used.

So, there's a real important, I think, I still think it's important to set it aside.

Maybe not necessarily just an automatic percentage, but what based off your prior years, you have an idea what you are going to need.

And staying ahead of it is important.

It does cost you money if you don't make the timely payments, but sometimes you don't have a choice.

The firm is running out of money, where are you going to borrow from?

And you're choosing between, do I put money out of my brokerage account back in?

Which a lot of people seem to have a problem with that.

Once they've taken money out of the firm, they don't like to put money back in.

But I would argue that if you're going to pay a bank 10 percent, why not pay yourself 10 percent on it, depending on what you're doing with your money and stuff.

The other thing is simply that you...

I have seen people use the IRS as the bank.

They won't pay their taxes.

And the IRS interest rates aren't insane when you go to work out an offer and compromise to pay all the time.

I don't advise it.

It doesn't look good on your credit.

You have to hire a tax attorney.

But I've seen multiple people employ that strategy.

As plaintiffs' lawyers, and we talked about this before we got on and started filming, it's very squishy, and you have to have this gut feeling and this huge appetite for risk.

One of the things I want to talk about are changes in the industry.

And I'll lead off this conversation with what I've observed.

So it seems to me that there used to be a stigma with advertising lawyers.

And to some extent, I think there still is among certain people.

They're just like, I don't want to hire an advertising lawyer.

But there's been this huge proliferation, in my view, of just the number of billboards I see, the number of TV advertisements, radio ads.

When I'm listening to FM radio sometimes, local station, it's not unusual to hear five to six radio ads during one commercial break, while another law firm's display is on the radio.

And you're like, what is going on here?

And I want to talk about that just from the standpoint of business models and how it's affected people's business models.

Because I think there's some thought, like if you're a doctor, hey, I'll just be really good at what I do and I'll get business.

I'll be really good as a lawyer and get business.

I do think it's easier to be a really good lawyer and be successful than to be a crappy lawyer but a good advertiser, for what that's worth.

But what changes have you seen in the industry since you...

Well, I guess, let me first ask, when did you start in the industry?

What year were you really doing a lot of PI work?

It's been about 19 years.

So when I really started...

So early 2000s.

So what changes have you observed since that over the last two decades in terms of the market and how firms have been structuring their business models?

Probably less than you would think.

During that time, I haven't done an accurate count, but probably been involved in starting 60 to 80 firms from the beginning with all different types of business models from the we only want to do litigation, specialty litigation, high-end litigation to we just want to do litigation, any type of litigation and then people who do the continuum.

A lot of them though had these referral relationships.

So whether you're doing litigation or doing just pre-settlement work, they had firms that they were connected to that would give them what they wanted because the firm had an abundance of them and wasn't in that area.

Not a lot would put a lot of money into advertising or believe that advertising was going to be the way that they were going to get most of their cases.

Of course, after paying large referral fees for a while, they would look to figure out ways that they could organically bring it in.

Of course, your websites and the SEO and the pay-per-click stuff was going on.

Of course, there were always big names on the billboards, but as you pointed out, there's a lot of billboards up now.

In fact, it's pretty interesting as you're heading to the airport going downtown with Grady and you look at nine billboards at the same time, it's usually nine different firms all displaying at the same time.

Sometimes with the digital ones too that rotate, it's different law firms on rotation.

My kids hear the names around the house of clients and we'll be driving around and they'll say, oh, that's a client, that's a client, that's a client.

It's funny to see these things, but the amount of money that has to be put into these advertising campaigns, especially to be competitive in this market.

Now, I've seen in more rural markets that even though the really big players are in there, if you can take the local approach to it and still put some money into the advertising, you can be pretty successful in picking that stuff up.

But I would imagine, of these firms that I was involved in starting, I only know of one or two that don't exist today.

So it seemed to be that if you were a good lawyer and you just went out on your own, it just worked out, that you figured it out.

I haven't been involved in starting any firms in probably the last five years.

So I don't have the recent perspective of how those folks have fared, but definitely have seen this switch to the advertising.

And I'm not sure where some of this money is coming from because it can be an enormous amount of money that people are spending.

Yes.

Again, I'm not going to name any names, because I think everybody's listening will see them on the billboards.

But I mean, there's some that it's just amazing, how many dozens of billboards you see around town.

I think the one thing that I would advise people, and you can tell me whether you agree with this or not, is the people who try to dabble in billboards.

Oh, I'll get a couple billboards.

It doesn't work.

I mean, billboards are not a lead generation platform.

They're a name recognition and branding platform.

Oh, I see Morgan & Morgan all the time.

I see Modlic all the time, whatever.

If you're a firm like ours, that isn't in that space, going and putting up a billboard on 75 is going to do absolutely nothing to you.

You might as well take the money, put it in a pile in your parking lot and light it on fire, because you'll at least get some pleasure from watching the money burn, maybe, starting a fire, keeping warm.

But that money to me is better spent on digital, because I think digital marketing is the one area that attorneys can somewhat level the playing field.

But even there, I see a major mistake where some people dabble in SEO.

Hey, I'm going to spend $5,000 to $10,000 a month for a year, just see what happens.

You're not getting anything.

Now, maybe if you're in a rural area, maybe that works.

But in Atlanta, it's not working.

And so I think the biggest thing that I would advise people is figure out what your identity is and where you want to get your cases from and build your marketing structure around that.

And we've talked about this on our podcast.

I have a diversified marketing source.

We decided when I started my firm, I didn't want to be overly reliant on attorney referrals.

But I also didn't want to be a direct-to-consumer type firm.

I didn't want to be on billboards TV.

And I'm not knocking that.

That just wasn't my business model.

And so what we've tried to do is just diversify that strategy and say, okay, I want to have attorney referrals over here.

I want to have some direct hire from clients, or I want to have from client referrals and some direct hires from maybe SEO or some other platforms.

And it's fluctuated over the years.

I mean, there's definitely been times where it seems like the pendulum swings far to the attorney side.

Other times where it's like, hey, we're not, especially during COVID, there weren't as many attorney referrals.

Then it goes back to SEO.

But I do think the one thing that has changed is you can still be a really good lawyer and get business.

But I think just the volume of referrals, at least on really good cases, has kind of changed unless you're in a niche practice.

Because I do think some firms are trying to copy the Morgan & Morgan model, which is we're going to build a trial law firm.

And I think some people know how I feel about the Morgan & Morgan business model.

I personally think they've got some phenomenal lawyers, but I just don't think it's great for clients if they've got one of 200 or 300 clients with one lawyer.

It's just not feasible, even if you get a good trial result.

Client experience probably isn't desirable.

But they are keeping their cases.

They're not looking to refer out, again, unless maybe as a niche area.

And so I do think it's more important now than maybe 20 years ago for attorneys to look at, okay, how am I going to generate my own business?

So I can at least have a source that makes me self-sufficient.

Yeah, I think it's very hard to figure that out.

And as an accountant, marketing expenses drive me crazy, right?

Because most of the time, you can't attribute the dollar spend to what comes in.

We have a suite at the Falcons game.

We're like, do we put this in?

Right.

If I get the suite for a concert, if I opt in for it, where do we put that?

Is that in the marketing bucket?

Does it depend on who I took to the event?

Well, and then take it down just the road of if you're spending $100,000 a month on billboards, and like you said, they don't necessarily, they help an overall campaign of awareness of a brand.

It doesn't, you didn't necessarily attribute that to it.

So I think there's a perfect example out there now.

One of the most common billboard you see has no website and no phone number on it.

So and it is all over the Southeast.

I don't know how people remember the name to find the person, but they must or there wouldn't be likely thousands of billboards out right now.

So marketing has to be just to me, my belief is it has to be just this combined multifaceted strategy that you just have to accept the fact a lot of time, you're not going to know where the clients come from.

However, what you don't know is you could be getting, you could be spending a million dollars a month.

So I've worked with firms with very large marketing budgets.

And the argument always is you're spending, okay, you're going to spend an extra 200 grand a month now.

And you don't necessarily see a remarkable increase in your leads or your cases.

And I have always challenged, well, let's take it down and see, let's reduce our marketing dollars and see how much falls off.

And of course, the fear is, oh, it's all going to go away.

And I think you need to find what the right point is to spend.

Well, there's also a lag time with a lot of these marketing campaigns.

I mean, we do a lot of things that are branding.

And that's a lot of what our marketing strategy is.

You don't get instant results from that.

That's just reinforcing yourself.

When you mentioned a million dollar a month marketing budget, by the way, our marketing director sitting in here, she started thinking about all the ways she could spend a million dollars a month on marketing.

That's crazy.

And I don't think it's any secret.

There are firms out there.

And I'm not talking about the Morgan & Morgan nationally.

Everybody knows they're spending just a crazy amount of money nationwide.

But there's firms in Atlanta that are spending a million dollars a month on marketing.

Yes, but then where do you think the focus of the firm goes to?

If you're spending that much money, you are focusing business-wise all on your marketing ideas and how many cases are coming in.

But what about getting the cases through the system?

And that's the next thing that I wanted to mention too, is I see firms...

There's a balance here because there's firms that focus too much on being a business and there's firms that focus on not being enough of a business.

And what I see some lawyers do is they think, I'm going to spend all this money on SEO.

Well, do you have the bandwidth to handle the calls if you have a large PPC budget?

Is it going to be you handling it?

Is it going to take away from you working on your cases?

What happens when those people become clients?

Are they going to be handled appropriately?

What's the client experience going to be like?

And I think you can look at Google reviews for some firms and tell when they're having problems.

So I think growth, they've got to take into account that they are in a service industry.

They're not selling widgets.

And so focusing on that client experience is important.

This has been a great conversation.

I have a lot more to go through.

So I want to talk one about how attorneys can get paid, the associates in particular.

So I get asked this question a lot, what's your compensation package?

And sometimes it's interesting.

I will not have talked to two or three different people, and we will each have a similar structure.

And we're like, wow, we each came up with this.

So maybe it makes sense or maybe we're all wrong.

What are the ways that you've seen firms structure attorney compensation within the firm?

And I'm not talking about partners.

We'll talk a little bit about that.

But how are they getting paid, whether it's bonus salary, combination of the two?

I've seen a lot of different models.

And I can't, I don't really have an opinion on which one is best because different firms, different cultures, different pools of associates are motivated by different things.

I think it's hard to have different systems within a firm, but it's hard to identify what is more successful than another one.

Obviously, there's the much lower base pay, and then a bonus.

Sometimes it's called a guaranteed bonus.

So I'm like, why is it even called a bonus?

Let's just go ahead and make it their salary.

It makes the attorneys feel better, John, because some people are risk averse, and they're like, well, I don't want that fixed cost.

We'll just call it a bonus.

It makes them feel better.

Well, and then sometimes, if the firm does well, there will be money on top of the guarantee.

Then there's people who, of course, track everything the associates do, whether they originate the case, whether they are lead on the case, whether they're just supporting the case.

And they have very objective measures and percentages of the fee that get assigned to that associate.

Sometimes the associates have control, and sometimes they don't to impact that.

So certain people would be really motivated by that.

If somebody can originate, and somebody can be tenacious and take cases all the way, why wouldn't you?

And then I've seen really unique situations where people earn through accomplishments, somewhat subjectively, earn shares of a bonus pool over time.

And then the firm commits to taking a certain percentage of profits every year and putting in that pool, and then depending on the shares that you own, or that you own, but that are allocated to you, that impacts how much of that...

You get some sort of credit based on the subjective criteria.

And that can work out really well because people get motivated and like being rewarded.

And one of the things I really like about that model, and I've seen this in a couple firms, when they have outstanding years, everybody does ridiculously well.

And then you see firms that have the opportunity to do really, really well.

And the staff knows, the associates know that you've had a good year, whether they see the books or not.

They're going to know that $25 million has come in the door and legal fees.

And they're often left wondering, why wasn't more of it shared?

And I think there's finding that right balance.

Yes, I've been a business owner and had 25 employees, and we actually tried to implement the pool thing.

And they didn't want it.

It was unanimous.

We finally weren't getting the response that we wanted out of it.

We went to everybody, what do you want?

We just want a good salary.

We don't want any variability in our compensation.

I'll tell you, I mean, I think for me, the one thing that I think plaintiffs' attorneys, because there is so much uncertainty and it is an unconventional industry, because it's all contingency fee, they have a tendency to want to do and copy what somebody else is doing, because it gives them comfort.

It's like, well, if I do it and it fails, at least I failed doing something that everybody else was doing instead of going out on a limb and trying something new.

But I think what I have found over the years is you have to figure out, okay, what is your business model?

What are the motivations I want to have?

Because however you structure your pay is going to influence behavior.

So for example, if you're strictly commission based, to me, you're fostering a culture that prioritizes settlements.

And maybe that works at a settlement mill.

But if you're focusing on a firm that is going to work cases up to trial and you want to get maximum value, may not be the best.

At the same time, if you have a firm that wants to foster collaboration and people working on cases together, having separate silos is going to discourage that because they're going to be territorial about their cases.

So what we've tried to do at our firm is not have a low salary, but not have the highest salary possible.

I mean, they're not going to make what they'd make it king and spalding.

But have a good base salary that's tied to their years of experience.

So if they're relatively new, it'll be one level.

If they're really experienced, it'll be a little higher.

And then have a structure that gives a percentage of the cases they resolve.

So at least there's some certainty in the bonus structure.

A lesser credit if they co-counsel the case with me or two people work on it together.

There's credit for if the case goes to trial, whether they're first year or second year, they get some percentage of the fee.

But the other thing that we do is we do give credit for case origination.

And I think if you're a plaintiff's firm, you absolutely have to.

Because what's going to happen is when you have a superstar employee and they're originating cases and they're not getting credit for it, they're just going to leave.

They should start their own firm and say, well, I can get this.

I do think the one thing, though, that is important is if you have a bonus plan, it can't be a black box bonus plan where nobody knows how it works.

And I did that for a few years where it was, well, we'll just kind of do a roll of thumb and see how everybody, you know, what kind of year it was.

And it just creates bad expectations, which leads to my next topic.

How do you pay staff versus attorneys, you know, paralegals, legal assistants?

Because we started out with, and I came from the firm that was kind of of the mindset that you pay a little bit below market, you have a good year, you get bonuses.

And what I found was, you know, staff doesn't like variability as much as attorneys do.

They just want to know, can they pay their bills?

But when you do go bonus heavy on some years, let's say you give, you know, a paralegal $35,000 bonus, like, wow, this is great, but the next year maybe they get 15.

$15,000, still a good bonus, but they're comparing it to the 35.

And it's like, well, I got, you know, $20,000 more last year and they're upset.

What have you seen in terms of staff compensation and how people pay their staff?

I think you already stated the most likely place where people end up, which is bonuses become expectations, in which case they're really not bonuses.

So I've seen everything from underpaid to heavy bonuses to similar type of situations like I just described with associates, to paying above market because having the right person in the right seat doing the right thing can be invaluable.

And then losing that person can be devastating.

So what does an extra $5,000 or $10,000 a year matter?

When you lose them, you really consider that.

So those are things that I've seen.

What I would do if I were setting up a firm and doing it, I would pay a little above market so that I can attract and retain.

And if I gave bonuses to the staff, it would be along with a lot of transparency of the success or challenges of the year so that people could attribute it to that so that it's not an expectation.

Yeah, I think you kind of touched on a point there that I didn't mention, which is attracting and hiring people.

When you're looking to hire people, particularly those who are maybe at a defense firm where the salaries are higher, it's very difficult to tell them to take a $20,000 pay cut and just trust you.

Just trust me and get a bonus.

Because they got bills to pay.

And they want that level of certainty.

So we went away from the model of let's pay a little bit slightly below market and then give, even if we have kind of like an okay year, they're still going to get a bonus that kind of gets them to where they were, maybe at a defense firm or what the market is.

If we have a great year, we're just going to get a huge bonus.

We moved away from that to more certainty, paying at market or a little bit above and then capping bonuses at 10% base salary.

So we tell the staff, and that doesn't apply to attorneys because they've got their separate bonus structure based on case origination and case resolutions.

But it gives some certainty and it allows them to kind of understand what's going on.

But then with that, we instituted a 401k.

So we started not only with the match, but the profit share.

And the profit share is, to me, kind of a win-win because then you can tell them, hey, we had a really great year.

We're going to give everybody X percent of their salary in a 401k.

And you also get some tax benefit to it, too.

So that's kind of my thought.

But transparency or visibility of that is really, really important.

And I had a client a couple of years ago come to me and say, my staff really don't understand what their compensation package really is.

So can you build out a grid so that they don't just understand the fact that they have this base, but this amount of their insurance is paid.

And, oh yeah, the 401k match.

Oh, and the profit sharing that's allocated to them so that people really can see what the whole package is.

Yeah, I mean, I think for health, health insurances are third biggest cost now, I think.

Maybe second, maybe second behind salary.

It's more than what we own the building, but we run it through LLC.

But I think it's astronomical.

It's really high.

And so I think it's important to tell people, hey, it's not just this base salary, it's this, especially when you're paying 100% of the health insurance, which we do.

Very, very generous.

And we have a good health insurance plan, and we contribute also, if they have family members, a percentage of that.

I have to talk about one topic, though, and I have a couple more I want to talk about, but one topic that just always confuses me and gets me tied in knots when I'm thinking about it and other lawyers, too, is how do you know when to hire somebody, when to add to your team?

Because when you're on the defense side, it's easy to make a dollar and cents calculation, or any firm that's billing by the hour.

Hey, I can hire this nurse paralegal and bill them out at X dollars an hour, or paralegal legal assistant, or whatever.

On our side, you can't really monetize it that way.

And I'll give you the example of a nurse consultant that we hired.

I knew we needed one, because I was spending way too much time screening med mouths.

I was spending too much time reviewing medical records, and I knew we needed one, but I can't bill her out.

I mean, I guess I could, but we don't.

But how do you advise firms on when do you know when you need to hire somebody?

Because I'll tell you, I mean, I know a lot of things, what I've done is kind of like just gut reaction.

Just like, yeah, it just seems like we kind of need somebody.

What do you tell people?

So that question is probably the most difficult question to answer, and I've received it many, many, many, many times over the last 20 years.

Because it depends, but it's also really complicated.

The process to figure it out with anything other than a guess is a complicated exercise, because it involves both financial stuff, the ability to do some forecasting of what's going to happen, as well as factoring in a lot of non-financial stuff that in the event, you know, if you keep up with your case management system, some of the non-financial metrics can be helpful in figuring that out, but many times the case management system is a bunch of garbage, and you can't rely on it.

So let's just take an associate, for example.

That's very much going to be an analysis of, obviously, the case load, expectation of where it's heading, the capacity of the existing associates.

But at the same time, you're going to have to contemplate, can I free up the existing associates with support staff?

Can I add more paralegals or legal secretaries so that we don't have to hire the associate?

There's tasks, at least, that are interchangeable when you're figuring out that staffing position.

But once you've figured out what your staffing formula is and you also know that a case, especially in your situation, but in many firms, a case is not a case is not a case.

They're each individually very different and require all kinds of different attention.

But to the extent you can average or try to normalize that, you try to figure out how many you need in each pod that can handle so many cases.

It's just it requires a lot of this CFO type level analysis and a lot of gut.

So I think that a lot of times when I'm asked to figure that out, it turns into, you know, if you really want an answer, that's not just based off of just my gut, then I'm going to take you down a road of asking a lot of questions, digging into a lot of data and trying to come up with, if there's not a structure already in place to try to make that an educated guess, then I'm going to suggest that that's built.

And then you're going to find out how accurate that is over time.

So, I'm sorry, it's an it's depends and it's a hard thing to figure out.

I'll tell you, there's several challenges that I found.

One is, okay, I already have this type of role in the firm, whether it's peer legal, attorney, whatever.

When do I need to hire for that?

That still can be a challenge, but it's a little bit easier.

What's really difficult is when do I create a new role?

So, you know, we have a marketing director now.

We haven't always had one.

You know, I didn't have one when I first started my firm.

When do you realize you need to hire one?

We have somebody that does the videos with us here filming the video today in the podcast.

How do you, you know, we don't have to have that, but I knew it would be an asset to the firm.

We have an operations director.

There's all sorts of roles that, you know, I think personal injury firms can have.

And the only advice I could give people just from going through it myself is figure out, you know, what do you want to, how do you want to be structured?

What types of cases are you going to be working on?

What are the types of things that need to be done in the cases?

You can't always, I mean, there's, you're always going to have to answer discovery in a litigation case.

You're always going to have to schedule depositions, those sorts of things.

There are certain unique things that vary by case, but you can put most, you know, maybe 75, 80% of it down to, okay, these things need to be done.

Then, you know, kind of build that structure around it.

The other thing as a law firm owner that I've realized is, you know, I don't like, I like the business side of it in terms of coming up with ideas and seeing them implemented, but I don't like being in the weeds on processes and procedures and things like that.

Like, I actually like working on my cases.

And so, you know, having people in place that can do that and implement that, and I can say, okay, I want this done on every case.

I have no idea how it should be, you know, done and what that process should look like.

You all figure it out.

That to me is, fits me more, but I know people that they want to be in the weeds doing that.

Well, you like, so you like doing cases, but you recognize the fact you have a business here and you put people in these positions to treat it like a business.

And I think that's really, I think the answer to your question is it's, you know, do you want to treat your law firm like a business?

Do you have the ability to?

Do you see the benefit of it or do you just want to treat it like a law firm?

One is going to be very proactive, one is going to be very reactive.

And if you're proactive and you have people who are there to work on the business.

So you work on the business and you also work in the business.

But part of you working on the business is recognizing that you need people who need to be working on the business all the time and are willing to make that investment to do it.

And it has served you well.

So it's really hard to make the time to work on the business and sometimes even recognize that it is a business.

The other thing too that I've tried to...

I've read this good book called Essentialism that a friend of mine, we talk about it sometimes, but it tells about kind of focusing on what are the essential things that you need to do in your business, in your life that kind of add value.

And I've tried to cut away as many of those non-essential things.

You know, I mean, it could be as simple as, hey, I'm writing a brief.

I want to do the strategy, the substance of it, but like, I don't need to be going through and plugging sites for the record all the time.

Like, that is something that in the past, I would have not delegated because it's like, I don't want to push my work off on somebody else.

But at the same time, it's like, well, I don't have to do that task.

My time would be better spent over here, shifting to this other case to give direction.

Maybe there is a key deposition I need to take or key depositions, but some of these other ones, pretty routine, I can delegate that.

And it really allows you to kind of maximize the amount of things you can work on when you approach it that way.

Let's talk about common mistakes lawyers make to wrap this up.

You already touched on one, co-making funds in the IELTA account.

That's a big one.

That's a disbarrable offense.

I mean, the state bar, in my view, could do a lot better in a lot of areas.

They kind of, in my view, are very lax on certain things, but the one area where it's like you're in trouble is if you're co-making loans, trust account violations.

Do you recommend that law firm owners that start their firm, as soon as they start, hire at least some outsourced bookkeeper if they're not going to have somebody in house?

Absolutely.

Even if you have somebody in house, of course, I sold that service for a long time.

And the biggest, even though the services that Abacus does evolved as clients asked for more stuff, it really started out with, there was in house bookkeepers, but you used us to reconcile everything and make sure it was all coded.

So it gets into the whole internal control, segregation of duties, somebody else looking at it, but it also helps get it done.

That's the biggest thing that I see is that people will not, they'll record stuff, but they won't do the reconciliations.

And the reason the reconciliations are so magical, and I don't want to go down this road on too much of a tangent, is because that's when you see what's missing or what's wrong.

And it's also where you see fraud and mistakes.

Banks make mistakes.

I have seen in an IOTA account, a half million dollar settlement recorded for $50,000.

All the disbursements went out, and it wasn't until it was reconciled that it was even determined that funds were being co-mingled because most of those checks that went out were being, other people money was technically being used.

So, you know, it's just, I think it's essential.

Do you recommend that lawyers move away from paper checks and do ACH or wire transfers for client disbursements?

It's expensive.

It's expensive to do that.

I've been looking at that, considering ACH, then you get into the whole verification of the account thing and you get into, you know, and people seem to be, more people seem to be sophisticated in that area of intercepting the ability, the communications and giving bad information.

There's no real good answer on the paper checks other than...

Just monitor it.

Well, and going through the hassle of positive pay.

What are some other mistakes, you know, except for the kind of IOLTA things that you've seen lawyers where you're like, you know, and maybe some common ones would be good, not just like the one off where it's like, hey, this was a really bad idea, I can't believe this person did this, but ones where you come in and you're looking and you're like, I'm seeing a theme here among these personal injury lawyers, they're not getting this right.

Well, a big one is expensing your case costs, putting it on the P&L.

And what happened is there was a tax case on the West Coast that had an opinion about putting expenses on the P&L, but there were subsequent challenges to it.

So it just, it creates all kinds of challenges because if you're doing that and you don't have a good system in place for tracking where it's coming from or what cases they're related to, then all of a sudden you're, can be years down the line, you're settling a case and you've got to try to figure out where your expenses, which means you've got to go through years of P&Ls as opposed to the balance sheet where it stays indefinitely until you take it off.

So what you're talking about is some lawyers will put it on the P&L and actually take it as a business expense for that year to reduce their taxable income.

And then if they do that, they're not supposed to do that in the first place, but if they do that, they have to then treat it as income when it comes back into the firm.

The correct way to do it is it's essentially a loan.

You are paying taxes on the revenue when it comes in, and then if you're having to pay case expenses or whatever, just tough for you as the law firm owner.

And I will tell you, that can be very painful from a cash flow standpoint when you're in growth mode.

Because you're, let's say that you've got this fluctuation, but for the whole year, maybe your case expenses went up $500,000.

Not only do you not have that $500,000, but you're having to spend 200 grand or whatever on all the taxes associated with it.

It can be really painful, which is why the credit line is so important and why I think having that so that you can have that peace of mind is important.

So another thing, just because you wanted some common things, and that is not using, either not using a case management system or not using the case management system the way it's intended.

Talking about whether it's Clio, Filevine, CasePeer, whatever.

I have those that I like better than others, but that's not my point.

It's simply that whatever you have, make sure the information is complete and accurate in it, because crappy data isn't useful.

Garbage in, garbage out.

Absolutely.

I think that's the biggest thing, too.

You can make these kind of gut reaction decisions, which are important to do when you're in a condemn CP practice.

We talked about that.

Sometimes you just got to go with your gut.

But there's times where my gut has been telling me one thing, and then I actually look at the data and ensure that the data is correct.

And I'm like, huh, my gut reaction was wrong.

We actually haven't been getting many attorney referrals last year or whatever.

Or we actually have been getting less Internet cases than I thought we did, because it just seemed like we were getting more, but maybe a lot of them weren't valid cases.

I do think it's important to look at that data and make, because there is so much uncertainty, like you said, at least make the database decisions that can be made with the right data.

Absolutely.

But within the last month, I have seen the best data of my career out of a case management system on items that, first of all, I know all the data is accurate, just because of the culture of the organization that's keeping it.

There's actually more data than I would even know how to use, but the decisions that could be made with this data is limitless.

And there's just not a commitment.

It's not a priority.

Keeping the AOLTA clean is not a priority for many firms.

Keeping your financial statements clean is not a priority, and keeping your case management data is not a priority.

Well, that's really, really helpful.

In terms of law firm owners, and I don't know a lot about finance, do you have any recommendations for at least kind of the things they need to know in their firm?

Like to have their finger on the pulse of their firm and just, hey, you at least need to know this.

You can check out on all the other stuff as much as you want, but know these things.

I think it's two very specific things.

Well, to me, the most important financial.

Indicator of how healthy a firm is, and it's not even on the balance sheet, is the case list.

I think it's understand your case list, understand your inventory, understand the approximate value timeframe and where it is, because keeping track of that and knowing where that is can give you an awful lot of peace of mind, even if you have to weather a rough time, having confidence that nine months out, there's a very large settlement is very, very important.

And then the other is just, it's cash, and the two kind of play hand in hand, because the worst experiences that firms have, and it's when we end up doing an awful lot of work, is when folks are out of money or going to be out of money, and they have to survive six months, and then we have to get really creative with really expensive loans.

And if you have a good case list, you can get those loans, 20%, but you can get those loans.

I think that's the most important thing for me when I looked at structuring my business model, was to try to understand there's going to be a roller coaster.

But let's try and even out some of those dips as much as we can.

And if you've only got, let's say, you're a boutique firm, you only have 15 cases, there's going to be a lot of dips.

The highs may be really high, but there's going to be a lot of dips.

And some people are okay with that, and that's what they want to work on.

Other firms want to have more stability, and I don't want stability for stability sake necessarily.

I just kind of knew overall what are the types of cases that I wanted to work on and the variety.

And so I guess that would be kind of my parting advice as we finish up here is for law firm owners to kind of come up with a plan that's unique and works for them instead of just saying, hey, I'm going to copy what Darl's doing or this other firm that I see on billboards, figure out, okay, what's going to work for you and come up with something.

The roller coaster can be really, really hard, and it's really fun in those big, big years.

So one is if you have the big years, leave enough money in the firm so that you can get to the next big year.

Or and or consider another business, another type of law to intermix with what you do that might be more consistent, because some of the best models I've seen are folks who find a type of law with recurring revenue, whether it's family or legal or something, that they build up big enough to cover their monthly burn.

So that enables them to really let that roller coaster run.

I think the one thing too that I've seen a lot of law firm owners, particularly younger ones, start to get into is just alternative businesses, investing in real estate and doing things so that their cash flow isn't solely tied to the law firm.

It's that they've got these other things out there going on.

And so, again, to me, it's all about diversification.

It's like a portfolio.

The more that you've diversified across these things, when one thing might be going bad, the other thing might be going good and vice versa.

How can people find you, John, if they want to talk to you and see if maybe you'd be a good fit for working together?

The best way is just to email me.

Just John at accountcfo.com.

Well, thanks for joining us, John.

This was very helpful.

I've learned a lot and hope everybody listening has as well.