Page 10 - Law Society of Hong Kong MPMC Manual v8 - With checklists (1 March 2018)

Practice Management Course | Unit 2
Financial Management

UNIT 2: FINANCIAL MANAGEMENT

Introduction
Practitioners who can understand and engage in the financial management of their practice are
better equipped to make sound business decisions and positively influence the profitability of their
practices. Improved financial performance, besides being a key goal per se, also allows the
practice to have greater flexibility in pursuing other desirable opportunities and to make strategic
decisions with an eye on the long run. The objective of this unit is to empower you to use relevant
information and tools to effectively manage the financial health of your practice.

Objectives
At the end of this unit, you will be able to:

• Explore criteria to evaluate new business.
• Discuss the budgeting process and different methods of building a budget.
• Evaluate time recording as a profit lever.
• Compare different pricing strategies and calculate their impact on profitability.
• Analyse how leverage and growth will influence the practice’s financial performance.
• Understand the financial impact of Work in Progress (WIP) and review WIP reports for
recoverability.
• Optimise WIP and debtor conversion in various areas of law and examine how both
profit and cash are affected.
• Develop ‘rules’ to account for and minimise doubtful debts and write offs.
• Relate cash flow to profit distribution and drawings.
• Estimate the costs of running a file, including how to initially scope.
• Calculate the ‘cost to finish’ if something triggers further costs, including how to talk to
a client about that.
• Analyse the costs of production of legal services.
• Manipulate different financial scenarios to predict profitability.
• Plan key ‘profit improvement’ strategies that can be effectively implemented.
• Calculate the practice’s net profitability and project the impact of changes to revenue.

Introduction

1. The objective of this unit is to give you the relevant information and tools to
effectively manage the financial health of your practice. It is not designed to cover
the rules relating to solicitors’ fees (Chapter 4 of the Guide) or to solicitors’
accounting requirements such as the Solicitors’ Accounts Rules, Accountant’s
Report Rules, Solicitors (General) Costs Rules and the Manual on Solicitors’
Accounting.

Exploring criteria to evaluate new business
2. The first step in financial management is understanding profitability. In particular,
more billable hours do not equate to increased profits. Consequently, it is important
to be selective about potential new business. Client and matter selections have a
direct impact on profit in various ways. For example, the financial position of the
client affects the fraction of billable work that is actually collected from the client.
Leverage and expenses may also be directly impacted as some clients, especially
new clients, may request that only senior lawyers work on their matters.

3. Indeed, a key strategic issue is the assessment of potential clients and work. All
clients have different characteristics. Some are easy to work for, pay their bills on
time and give clear instructions, but others are not so easy. It is human nature to

© The Law Society of Hong Kong (2018) Page 6