Your Law Firm Financials Contain Valuable Information That Can Help You Be More Profitable
Law school may have taught you how to be a great lawyer but it didn’t teach you how to evaluate and understand your financials. Why is this important? Your financials contain valuable information that can help you be more profitable. Quit thinking of it as information only for your tax return.
Benchmarks & Kpi
Benchmarks and KPIs (key performance indicators) give you a quick measurement value that will help you determine if you are reaching your firm goals. Ultimately if you are hitting your targets each month you will reach your overall goal at the end of the year. Before we jump into benchmarks and KPIs, let me stress that you can only rely on these metrics if your legal accounting is accurate and timely. Having inaccurate accounting leads to inaccurate metrics. And reviewing metrics that are months old won’t help you either. You need information that is up to date that can help you see what to change immediately.
Also, these metrics are broad. Different metrics might apply to different areas of law. For example, a criminal defense attorney may have different metrics than an estate planning attorney simply because how they operate their practices is different.
One thing I hate about benchmarks is you’re comparing yourself to an industry standard. Stop! That doesn’t matter. There are too many variables that go into a benchmark such as law firm size, location, or legal practice area. Define what your goal is first and what you want your firm to look like. Then create the benchmark or goal KPI.
Below is a list and explanation of helpful KPIs for you to consider tracking in your firm.
Revenue Per Employee: Gross Revenue Divided By Total Employees.
This metric will help you see if you are over or under staffed, or if you are under billing.
There are several ways to improve this metric. The most obvious would be to increase billings, however, I’d like for you to think about value. How can you sell more value to your clients? Other ways to improve this would be to educate your staff so they can provide higher value, document and implement systems and processes so you are more efficient, and have low employee turnover.
Overhead On Hand: Overhead Expenses Divided By Operating Funds
This tells you how many months of overhead expenses you have in your checking account. Or, how long can you keep the doors open if you brought in $0 revenue.
This is a very helpful metric. Have you ever wondered how much money you need to keep in your checking account? Or you’re not sure how much you can take home in draws. This will tell you.
Look at your yearly Profit & Loss statement. At the bottom you will find “Total Expenses”. Divide this by 12 (or by the number of months you are viewing). This gives you average monthly operating expenses, which is what it costs to run your firm. Now determine how many months of operating expenses you want to keep on hand. How much makes you feel comfortable? I recommend at least 2 months.
Balance In Your Iolta Trust Account
This represents unbilled work (once you take out cost deposits or escrow funds).
There are a couple of reasons to track this amount. It will help you determine if you need to bill your fees or you need to finish the client matter. If it’s the first reason, you should have a solid process in place to bill all finished client matters on a regular basis. Especially by the end of the month so that your revenue is consistent with your time spent.
If it’s the second reason, you should have a process in place to evaluate client matters on a regular basis so that the case is constantly moving forward.
Pay To Partners: Owners Salary + Draw Divided By Revenue
What are you actually taking home? It’s easy to reinvest your profits back into the firm but you should be getting paid and getting a return on the business.
As you get closer to selling your firm you’ll especially want to track this metric. You can sell the law firm for more if you are getting a consistent return.
Here’s a list of other useful KPIs:
Amount of outstanding Accounts Receivable
Number of cases closed in a month
Average value of cases
Amount of debt owed
As you can see, anything measurable can be a benchmark or KPI for your law firm. You’ll want to track what is important to you and what will help you stay on target to reach your overall goals for your firm.
Hopefully you will see your accounting can do so much more than help you file a tax return at the end of the year. It can tell your financial story and firm strength! These numbers are not only important now but they will be in the long run if you ever want to sell your firm.
Aligned CPA helps solo and small law firms. We’d love a chance to talk and see if we would be a good fit for your firm. Contact us for a consultation today.
I help solo and small law firms, and other service professionals, by providing accounting, tax preparation and proactive tax planning services.
I promise you, working with a CPA can be much more exciting than crunching numbers and reviewing last year’s taxes. I look at the day-to-day of your business and help you find ways to perform better, grow bigger and generate revenue with greater ease.