You may be surprised at what is in on record with your secretary of state. We have a client in California that recently came up for its annual renewal of our agreement. As part of the renewal we did our standard check to make sure nobody else had filed UCCs on the firm’s accounts receivable. That routine check turned up a $2 million lien against the law firm! It was filed by a disgruntled former client of the firm.
This individual had logged on to the California Secretary of State’s website and created a fictitious UCC filing against the law firm for $2 million. The firm didn’t know it was there until we checked and let them know about it. I’m not sure they would have known until they had to go find some other financing and it could have potentially blown a deal for them. Because the firm had never granted a security interest to the filer of the UCC, the UCC was worthless, but it still raised a red flag during the renewal process and could have delayed any new transactions that the law firm had been seeking.
So it’s important to monitor liens filed on you and your law firm. It only takes a few moments to check UCC filings using LexisNexis® or Westlaw®. This is another good annual exercise. Even if you see the UCCs filed that you expect, such as from your current lenders, look closely at the description of collateral in the filings. It is very common for a borrower to think their line of credit is secured by their real estate but for the lender to actually file on the firm’s accounts receivable or even all the assets of the firm. Again, this can cause costly delays when applying for or renewing loans or leases and it costs nothing to monitor.
Click on the video to watch part 2 of Mr. Swanson’s interview with Eric Fong of Fong Law in Port Orchard, Washington, as he discusses how his experience as a public defender helps him serve his clients better.
Click on the video to watch Mr. Swanson’s interview with Brewster Rawls of Rawls, McNelis & Mitchell, P.C. in Richmond, Virginia, as he talks about the recent news concerning medical malpractice taking placing in in VA hospitals across the nation.
Like the owners of any business, the partners of contingent-fee law firms divide time between financial activities (reviewing statements, managing cash, etc.) and non-financial activities (taking care of clients, marketing, hiring, etc.). My experience has been that, compared to most business people, trial lawyers generally spend far too little time reviewing and understanding the key financial reports at their firm.
This is understandable, because contrary to popular opinion, the trial lawyers I know did not get into the practice of law primarily as a means of making money. They do what they do because they enjoy helping people. So the financial aspect of law practice may not really appeal to them. They’d rather be taking care of a client or working on a case. More often than not, they may only look at their financial statements once a year, and even then it is done briefly and without a lot of understanding. After all, they don’t teach financial accounting in law school! And while the firm’s bookkeeper may do a great job with day-to-day matters, they are rarely equipped to analyze the practice and advise the partners on financial matters.
The problem that I often see developing from this situation is that if the financial end of the practice is not adequately managed, small problems become big ones and ultimately the practice is not able to maximize its ability to serve its clients, regardless of the good intentions of the partners.
So I recommend a few simple steps that I believe will pay back the relatively small cost in time and expenses many times over.
First, if you don’t have a person in house who is capable of preparing financial statements, contract it out to a competent CPA. The statements should include an Income Statement, Balance Sheet and Cash Flow Statement. They should be reviewed at least quarterly, but monthly is ideal, especially if it is a medium to large law firm.
Secondly, pay your CPA to take the initiative to schedule the regular meeting at which you will review the statements together. Also, pay this CPA to critique what they see. What looks out of place to them? How would an outsider (e.g., a bank) view these statements? What expenses look too high? Where is most of the cash in the firm going? That’s the discussion you need to be having.
I guarantee this will be painful at first but you will learn a lot about your practice and will be able to spot small problems before they become large. You’ll see exactly where your strengths and weaknesses are financially and will be better equipped in the long term to seek justice on behalf of your clients more effectively. You’ll also be able to worry less and concentrate on your cases better knowing that you have put in place a disciplined system of regular financial review. And should you ever decide to seek outside capital, your chances of success will be greater and with lower costs.
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