There are two categories of capital - short-term or working capital which is used to fund daily operations and long term capital which is used to pay for capital assets such as furniture and fixtures, computers and other office equipment. I guess I am old school but I believe that short term working capital should be funded as much as possible with partner capital and long term capital funded with bank borrowing or leases. I have more and more clients that are funding working capital with partner capital and have no bank debt at all. I have other clients that finance all working capital with their bank line of credit - these firms could find themselves in dire straits if bank credit should tighten in the future.

The amount of working capital needed by a firm depends upon your practice, billing and collection cycles, whether you do contingency fee work, and whether the firm is growing and adding attorneys and staff.

As a rule of thumb I suggest that a firm have three times one month's expenses excluding draws in working capital. This would need to be increased if the firm has lengthy billing and collection cycles, does contingency fee work, and is in a growth mode.

Partner capital contributions are usually made proportionately based on partner earnings or ownership percentages.

Keep in mind that advertising is only one form of promotion and promotion is only one of the four elements of a firm's marketing mix. Other elements such as service strategy, pricing strategy, and service delivery strategy are often more important to the firm than its promotion strategy. For firms that are providing commodity type legal services such as personal injury, divorce etc., extensive advertising can work very effectively. However, for firms that are providing customized differentiated legal services this form of promotion is usually not effective nor appropriate. This is why it is so important for law firms to formulate their business and marketing strategies and plans before implementing specific marketing promotional programs.

Question Our firm is a five attorney personal injury plaintiff law firm located in San Francisco. We have 2 equity partners, one non-equity partner and two associates. One hundred percent of our fees are contingency fees. Our attorneys work on some cases together. We do not keep time sheets.

The two equity partners are compensated based upon their ownership interests and this has worked well. We are looking to improve our compensation for the non-equity partner and the two associates. Currently they are paid salaries and a percentage of firm collected fee revenue over a certain threshold. We feel that they have not been profitable and we have been overpaying them. We would appreciate your thoughts.

Answer:Personally I think that a percentage of firm revenue or profit should generally be reserved for equity partners or shareholders. There should be a reason for them to want to become equity partners. I would tie the majority of their compensation to individual performance - client origination revenue, working attorney production revenue, and responsible attorney revenue, and case profitability - being the primary factors.

Develop specific guidelines for client origination (rules for the credit - direct effort of the attorney versus the brand of the firm). Since you don't keep time sheets you will have to develop some method for allocating the working attorney credit when attorneys work together on cases - subjective determination of value and contribution to the case, etc. Without timesheets it will also difficult to determine profit at the matter/case level. Decide how you want to weigh origination, working attorney, responsible attorney and case profitability and then use these to determine a compensation percentage to be used for overall compensation or bonus.

Are you looking for a quick and dirty checklist to use to review the profitability of your practice. Click below for a copy of our Law Practice Profitability Checkup.

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