Like every other business, law firms should be making data-driven decisions in order to succeed. Data can provide insights to answer key questions such as to what initiatives have the most likelihood of increasing profits or where expenses can be reduced. By analyzing and reviewing key metrics, you can make informed decisions for the firm’s future.
Work in Progress & Accounts Receivable by Aging
To avoid collection issues pay attention to these essential billing metrics, which let you know how much is owed to the firm (accounts receivable) and what is due to be billed (Work in Progress, also known as WIP). For WIP, keep an eye on current retainers and if they’ll need to be replenished to meet upcoming bills. Be sure to evaluate accounts receivable to see how many clients are actually paying you. This will help you determine at what point work should be paused, notice any repeat offenders and see if growing collections are becoming a problem.
Revenue by Practice Area and Individual
When looking at the amount of revenue generated by practice areas and individuals, it’s important to see what part of that is actually earned fees rather than looking at total invoice amounts. Some firms use this data to assign fee distributions for attorneys based on the total amount they brought in as either a goal setting or motivational effort.
Utilization & Realization Rate
Looking closely at utilization can highlight efficiencies or issues by looking at much time spent is actually billed. The realization rate shows how much of time that is billed is actually paid by the client, which can be affected by a number of factors. These two items will show if there should be a change in processes, whether to internal workflows or billing practices.
Fixed/Contingency Fee Case Profitability Ratios
Track how billing charges relate to your overall case profitability to determine if you’re charging an appropriate fee, one that’s fair but also covers business expenses and generates a profit. Each case needs to be making you money or else something needs to change, whether it’s a higher fixed fee or more discretion in which contingency fee cases to take on.
Pay attention to firm costs month to month or at the very least year to year to determine if there are certain areas where cutbacks can be made or if there are high ROI costs that more budget should be devoted to. Also, look at client costs closely as they’re often paid out of pocket by the firm but aren’t always recovered and check for any waived balances that include costs.
Profitability by Case, Practice Area, and Partner
Profitability is the true measure of a firm’s success, taking into account how revenue is impacted by expenses. The Income Statement, or Profit & Loss Statement, is commonly used to evaluate profitability but it’s extremely helpful to assess by other criteria such as practice area and attorney. Most of today’s accounting tools support class-based accounting where you can define classes such as matter type and attorney, letting you use this data to decide where to place efforts going forward.
Administrative vs. Overhead Cost Proportion
Not all work is billable, but even unbillable time should be tracked to determine where there may be inefficiencies or bottlenecks. Be aware of overhead costs, taking into consideration the option to pass some of the costs onto clients if you’re not already doing so.
Overall Financial Trends
Evaluating a singular month or year isn’t enough data to see the direction the firm is headed. In business ups and downs are common, but in comparing them to several months or years prior you can gain a better understanding of the overall financial shape of the firm. Consecutive years of a downward trend could be an issue, while an overall upswing could mean a current slow down isn’t affecting the big picture.
Percentage of Repeat & Referred Business
If you’re in a practice area that often sees repeat clients, you should know the percentage of your clients that fall into that category. Referrals should also be evaluated to determine what percentage of clients are providing them and how much of your work is from referral sources. From there you can decide if you want to invest in trying to increase those percentages.
Business Development Effort & Cost Analysis
Building a client base takes work, but you want to do it wisely. Keep track of marketing costs, including both time and expenses, and what your return is to figure out what’s working and what’s not.
Use The Right Tools
The last thing a business should do is make strategic decisions based on gut feelings or what they think is happening. Using the above metrics you can put valuable data to use to make educated business decisions. This can seem like a lot to track if you’re doing it manually, but if you leverage technology and the right tools you can easily generate reports designed to show you all the necessary data pieces and more to guide your firm in the right direction.