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A cash flow statement reports the movement of cash into and out of your firm in a given year. Of course, it’s critical that any firm continue to attract new clients and strengthen its existing relationships to bring in more revenue. But it’s also important to minimize costs. There are two cost centers that dominate the outward flow of cash from a firm: real estate and personnel expenses. REAL ESTATE There are several components of a firm’s annual real estate expense. You’ll want to monitor the following: Location. Some very successful firms are now realizing that they don’t need to impress their clients quite as much as in the past. Clients are looking for reasonably priced quality firms. If the law firm is on the outside of the downtown area, for example, this may not matter to the clients. Yet the cost of the leased premises can be significantly lower for the law firm, resulting in higher profits in spite of lower legal costs for the clients. Common area charges. If you have a long-term lease with common area charges being assessed annually, there is normally an audit provision in the lease. If you haven’t requested an audit in some time, you may want to consider getting one now. Frequently, lease provisions include penalties in the event an audit results in uncovering a landlord’s excessive charges; in such event, the tenant has some leverage to renegotiate the lease with more favorable rental provisions. Space allocation. Internal space planning also has an impact on overall real estate costs. For example, if there are “partner” sized offices as opposed to smaller offices (reflecting a more egalitarian firm culture), a more efficient use of space may be possible. This lowers costs and increases profits. Technology. Review your space to determine its electronic vitality. Update the wiring for the most efficient use by telephones, photocopy machines and computers. Then, bring in the latest, most economical equipment you can afford. For example, using scanning technology will ultimately allow you to move toward an office that uses less paper — ultimately reducing the number of hard copy documents that you need to store and reduce your ongoing real estate costs. Your short-term investment will pay long-term dividends in increased profits. PERSONNEL Compensation. While compensation must be competitive in today’s market, people generally don’t work for money alone. If given a choice, they will work where they feel comfortable with the firm’s culture, and where they like and trust the people who surround them. Address the needs of your staff and you will have a dedicated and efficient work force — one populated by people who feel they make a difference to the firm’s clients and who will go out of their way to serve. This is what keeps clients returning and referring more business to the firm. Professional Development. With the focus on billable hours, education and mentoring have been placed on hold by many firms. Perhaps because of this, newer (generally younger) lawyers look for those firms that emphasize education as an investment rather than as an expense. Great training programs go a long way to attract and retain great lawyers and outstanding staff. While many law firms look at this as an expense item, it really is an investment. It is possible to review this item and actually create a “return on investment” (ROI) analysis. Insurance. Workers’ compensation coverage has become so complex that there are specialists who advise lawyers in the field. Law firms are not alone in this. All businesses are impacted by the high cost in the field. Health insurance and E&O insurance are two other areas of substantial and continuing cost increases. Longer-term contracts, where available, can ensure coverage continues even when rates may be reviewed annually and increased. Keep watch on the insurance field. In the short term, rates are likely to continue to rise. Plan for it; don’t be surprised. However, in the longer-term of perhaps four to seven years from now, it is being suggested by some that rates will become more competitive with the cyclical re-entry of new insurance carriers without an extensive background in the claims pending today. Outside of these two primary expenses it’s advisable to create a calendar of cost controls. Periodically, review various categories of expense items. A systematic, periodic review and bidding of new vendors will go a long way to keep your costs under control and consistent with the current competitive market. The firm that operates on a “client-driven” strategy, a strategy that seeks first to learn the clients’ wants and then to serve them, rather than a strategy that focuses on the lawyers’ needs and tastes, will not only survive, but also thrive in the future. Protect your human capital, be modest in your expenditures rather than expansive or lavish, invest in cost-reducing projects and your future will be strong and profitable. Edward Poll is a law firm management consultant based in Venice, Calif. He can be reached at [email protected]

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