Page 14 - Law Society of Hong Kong MPMC Manual v8 - With checklists (1 March 2018)

Practice Management Course | Unit 2
Financial Management

18. It is indeed important to measure and account for WIP write-offs and understand
the reasons for them so that changes in practice can be made to minimise future
write offs. What is measured can be managed. The following table can be used as a
WIP review tool:

Month
Matter ID
Total WIP
WIP write-off
Could anything
have prevented
this write-off?
Process to be
implemented to
reduce write-off

Managing WIP delays
19. Another important metric for law practices to track is the age of WIP. The age of
WIP is the period of time between doing work and issuing a bill for that work. WIP
management is a crucial component of overall financial management. First, it has a
big impact on the cash flow of a practice; WIP cannot be converted to cash until it
is billed, so delays in resolving WIP should be tracked and minimised. A good rule
of thumb is that, depending on your area of law, WIP should be billed at least
monthly.

20. In addition, delays in billing WIP at the end of a matter may make fee recovery
difficult. For example, a client is more likely to dispute a bill where the result is not
favourable to the client, or where the client has simply forgotten the value of what
has been done for them over a lengthy matter. The longer WIP remains – the
greater the time lag between ‘doing’ and ‘billing’ – the less likely it is to be
recoverable. Even the practitioner may have forgotten the true value and amount
of work that has been done on the matter, and perhaps there may be a loss of
communication between the client and practitioner. This problem only worsens with
the passage of time. Therefore, to maximise conversion, delays in billing WIP
should be minimised, and communication with the client regarding WIP should be
maximised. To avoid disputes with the client, an expectation should be set with the
client that they will be regularly billed. A good rule of thumb is that WIP should be
reviewed on a monthly basis.

Doubtful debts
21. Doubtful debts are debts with a low likelihood of recoverability. Doubtful debts have
a direct impact on the bottom line of a practice, as well as its cash flow. Not only is
payment not received on time, but the practice must also incur expenses associated
with debt collection (such as extra work performed by accounts staff, hiring
external collectors, and incurring interest on any overdraft). Practices that do not
possess a doubtful debts provision, or do not regularly review their debtors’ list for
doubtful debts, have too much working capital locked up in debtors and are likely to
overstate their financial position.

22. If a practice has debtors over 45 days, there is room for improvement. There really
should be none over 60 days. Research shows that if you take action at 30 days,

© The Law Society of Hong Kong (2018) Page 10