Law Firm Realization Rate: What is it & How to Improve it
In order to grow and remain profitable, law firms need to understand the financial side of their operation.
One important component of this is the ‘realization rate’, which tracks how much earned money you actually receive.
There are a few different types of realization rates and they each fullfill different purposes. In this piece, we’ll explore the major categories, how they can be tracked, and how they can be improved.
What is a Law Firm’s Realization Rate?
A law firm’s realization rate is the total fraction of billable time that is actually paid. For example, if you work 100 hours on a complex legal case and only get paid for 90 of those hours, your law firm realization rate would be 90%.
There are many things that can cause a realization rate to be less than 100%. A particular client could continually delay payment or otherwise refuse to pay. But, there are other, more benign reasons too. You might negotiate a discount for a client, which would reduce your realization rate before you send the bill. Alternatively, you might write off particular services, which would reduce your realization rate after you send the bill.
What Are The Different Types of Realization Rates?
There are three main types of realization rates: billing, collection, and overall realization. Below, we’ll provide a brief overview of each.
Billing Realization Rate
A law firm’s billing realization rate is defined as the ratio between what you billed a client and what you would have billed a client at your standard rates. An example will make this clearer.
If you’re wondering how to calculate realization rates for billing, it’s fairly straightforward. Suppose your usual rate is $175/hr, and you work 10 hours for a client. At this rate, your bill should be $1,750. If you negotiate with a client to only charge $1,500 for this work, however, then your billing realization rate is $1,500/$1,750 = 85.7%.
Collection Realization Rate
The collection realization rate for a law firm refers to the ratio between the actual amount of money you collected versus what you billed out.
For example, if in March 2023 you sent out invoices totaling $30,000 and you collected $28,000, your collection realization rate would be $28,000/$30,000 = 93.3%.
You can think of the collection realization rate as being a measure of how efficiently you turn work into cash. The higher your collection realization rate, the better you are at making sure bills get paid and bringing in money that your law firm needs to continue operating.
Overall Realization Rate
The overall realization rate is a composite measure that combines both the billing realization rate and the collection realization rate. It is defined as the ratio between total cash in and how much cash you would’ve brought in if you’d charged for and collected your full fees.
For instance, if your hourly rate is $175 and you do 30 hours of work for a client in a given month, you should theoretically be collecting $5,250. If you end up collecting $4,750 after discounts, write-offs, etc., then your overall realization rate would be just north of 90%.
Why is The Realization Rate Important for Law Firms?
Like any other business, a profitable law firm needs to have a good grasp of its finances. Firms need to understand what they’re bringing in every month, as well as how much money they’re spending, and on what.
This knowledge allows a legal practice to answer questions about its law firm revenue, where it can reduce expenses, and whether it needs to expand or reduce staff.
The billing, collection, and overall realization rates are important tools that can help. Together, they allow you to quantify a particular aspect of your law firm’s operation, which allow you to make adjustments to how you handle discounts or billing to bring in more money.
How to Calculate Realization Rates for Your Law Firm
Given the importance of the realization rate to your law firm’s success, it’s worth spending some time understanding how this rate can be measured. There are a couple common ways, including the standard billing realization percentage and the fees collected realization percentage
These are important law firm KPIs to track, so in the next few sections, we’ll explore each.
Standard Billing Realization Percentage
The standard billing realization percentage measures the ratio of what you actually ended up charging a client compared to what you would’ve charged the client at your standard rates.
To repeat our earlier example, if your rate is $175 an hour but you only collect $1,500 for 10 hours of work, then your standard billing realization percentage is 85.7%.
On its own, a standard billing realization percentage of less than 100% is not necessarily a bad thing. There are many reasons a lawyer might want to give a particular client a discount, either during the initial negotiations or when sitting down to calculate the final cost for services rendered.
The important thing is that you know what your standard billing realization percentage is, because that will allow you to make informed decisions about how you run your legal practice.
Fees Collected Realization Percentage
The fees collected realization percentage is the ratio of the fees you’ve collected from a client to the actual amount they were charged. A client which owes you $5,000 and ultimately pays $4,250 represents a fees collected realization percentage of 85%.
Fees collected realization gives you insight into the number of write-offs you’re issuing and how they’re impacting your bottom line. The more write-offs the lower your fees collected realization percentage, and vice versa.
A fees collected realization percentage below 100% doesn’t automatically signal a problem. But if you find that you’re habitually offering lots and lots of write-offs, that could indicate high levels of client dissatisfaction. If that ends up being the case, changing the way you work with your clients could boost your profitability.
How to Improve Your Law Firm’s Realization Rate
Your law firm’s realization rate is extremely important to the success of your business, so you need to understand the primary ways of improving it. This includes setting clear goals, using time-tracking software such as LawPay Pro, and tracking past-due accounts.
Set Clear Goals for Your Firm
We’ve noted that the different realization rates might decrease because of discounts and write-offs. There’s nothing wrong with this practice, but it’s important to understand when it’s occurring and why, so you can make adjustments as required.
One way to approach this task is by setting SMART goals, i.e. goals that are specific, measurable, achievable, relevant, and time-bound.
When it comes to improving realization rates, for example, you can start by clearly stating your firm’s policies on discounts and making sure your lawyers understand what they are. When someone in your firm does offer a discount, have them explain their reason for it in writing.
This way, you can make sure they’re abiding by the established rules and not leaving money on the table.
Use Time-Tracking Software
Since hourly billing is still the most common way for attorneys to price their services, it’s crucial that you keep track of your time. Not only does this ensure that you’re billing for all the work you do, it also allows you to spot inefficiencies and correct them.
Software tools like LawPay Pro make this task vastly easier. You can effortlessly track time entries and expenses with built-in timers. Afterward, your invoices will dynamically update making it easy once it’s time to bill.
In addition, LawPay Pro supports other crucial functions like invoice creation and collections, contact management, and payment scheduling.
Given how much easier it is to track time using software, it’s no surprise that the use of legal payments software jumped from 13% to 34% between 2021 and 2022.
Track Past-Due Accounts
If clients don’t pay their bills, that’s going to negatively impact your business. And, with all the complications of running a successful legal practice, it’s easy for these tasks to fall through the cracks.
Software that provides robust, automated reporting can help by showcasing billing and payment cycles, as well as track your team’s billable hours.
For instance, LawPay Pro provides financial reports that can help your firm boost productivity and profitability with the following:
- Accounts receivable reports that provide a detailed list of aging invoices so that you know exactly which invoices are outstanding and how much time has passed since they were sent out
- Trust Account reports that show trust balance and activities so that you can easily manage trust accounts, while avoiding commingling
- Productivity reports that show you billable and non-billable time and expenses for each member of your staff
In addition, consider accepting online payments. Clients are increasingly looking for a variety of ways to make payments. By providing digital options, you can decrease past-due accounts and increase cash flow.
Streamline Your Financial Operations With LawPay Pro
The legal profession is changing, and more attorneys are turning to software solutions to help them manage the complexity of their work. LawPay Pro can help you modernize your legal practice and boost your bottom line by offering text-to-pay, legal fee lending solutions, law firm reporting, trust reconciliation, and more. Learn what LawPay Pro can do for you by scheduling a demo today!