What many potential partners forget is that becoming a partner is also taking a step up and owning a slice of the business. As every business owner knows, you don’t need to be an accountant to manage the finances of your business carefully, but you do need to be familiar with the financial KPIs which determine firm performance. Here is our short guide (taken from ‘How to make partner and still have a life’) to the common financial terms used in a professional services firm:
WIP or work in progress: This refers to work that is being completed for clients, but not yet billed or invoiced.
Chargeable or billable work, expenses, time or hours: These are blocks of time, expenses or pieces of work for which the firm can charge clients.
Non-chargeable or non-billable work, expenses, time or hours, sometimes called firm time: These are blocks of time or pieces of work, such as marketing, internal working groups or committees, recruitment, networking and training, for which the firm cannot charge clients.
Chargeout rate: This is the rate at which fee earners time is charged out to clients. (See below)
Lock-up: This is the amount of cash still ‘locked up in the firm’, because either the firm has not yet billed the client for the work, i.e. WIP, or the client hasn’t yet paid their bill. Lock-up is often broken down into WIP lock-up, where the client hasn’t yet been billed, and Debtor lock-up, where the client hasn’t yet paid their bill.
Payment terms: This is how many days the client needs to pay its bill after the work has been delivered.
Utilisation: Each fee earner is normally given a target for the amount of hours or days (depending on the firm’s financial model) that they need to bill to clients. If a fee earner is fully utilised, they will have used all their available chargeable hours on billable client work.
Realisation or recovery: This is a measure of how many billable hours the firm records which it actually charges out to the client. It is typically expressed as a percentage.
Gearing or leverage: This is a term that represents the ratio of partners to fee earners within a firm or practice area. Typically, but not always, the higher the gearing the more profits generated per partner.
Profit and loss (P&L) statement: It represents over a period of time how much money the firm has made or lost during that time. The firm’s annual accounts will include a P&L statement for the financial year.
Balance Sheet: This is a snapshot of a firm’s financial position at any one point in time. It includes the firm’s assets (what it owns), its liabilities (what it owes to other people) and its net worth. The firm’s annual accounts will include a balance sheet for the firm’s financial position at the end of its financial year.