Profitability and compliance are two critical components for the success of any law firm. You may think they’re often unrelated but these items are actually closely connected. Making simple changes to various aspects of your practice management can increase both your profitability and compliance standards at the same time — making sure you’re not only bringing in more money but also doing it the right way. While every business wants to be able to make dramatic changes and see skyrocketing profits, law firms can’t ignore strict compliance regulations looming overhead. Your practice and license can be on the line if not handled correctly.
What to Consider When Talking About Profitability
As you probably know, profit is equal to revenue minus costs. But it’s even more important to factor in the efficient use of resources into the equation. If the cost of resources in your firm is very high and you have inefficient workflows, your profits will be directly impacted.
To accurately assess an efficient use of resources, you’ll need to think about some of the following important questions. What is your profit and where are you incurring costs? Do you know where your revenue is the highest among the attorneys, activities, and/or practice areas in your firm? Are you measuring revenue based on legal fees collected or fees billed to clients? Without assessing and reviewing this data it can be difficult to understand where improvements can be made.
Here are 5 areas of your law practice where you can look to improve your processes and workflows to ensure that you see growing profits all while staying compliant:
Increase Profitability & Compliance: Timekeeping & Billing
Capture time and expenses in real time. If you wait until the end of the month, you’re likely to miss some items, and what a client isn’t invoiced for, doesn’t get paid — cutting into your profits. Use anytime, anywhere access and mobile practice management apps to stay on top of inputting. This also means that you’re not going back in the records and “guessing” at how much time was spent on a particular task for your client, which can easily lead to mistakes and costly client disputes.
Set up regular billing workflows to streamline the process by using batch invoicing generation and delivery. The less time you spend on billing, the more time to you have to actually earn revenue through billable hours. Implementing a regular billing schedule as part of your workflow will get your clients used to when the invoice will arrive and will make it more likely that you’ll get paid on time.
Automate collection reminders so overdue invoices don’t become neglected. Evergreen retainers will help with the collections process. Reach out to clients with automatic notifications as their retainer balances hit a particular threshold. Don’t let these deplete or you may be stuck in the situation of having to work without compensation, or (potentially worse) overdrafting from accounts or taking money from another client — which would be a major compliance violation.
Increase Profitability & Compliance: Trust Accounting
Trust accounting is notorious for its compliance pitfalls, but a few careful steps will not only ensure compliance but boost your profitability. Move your earned funds into the correct account as soon as possible and always record trust funds as a liability rather than income to ensure you’re being taxed properly. A legal-specific trust accounting program with safeguards to prevent trust accounting errors will help you avoid errors and easily pass an audit.
To see more about potential trust accounting pitfalls, take a look at our guide Beyond the Basics: Advanced Trust Accounting Challenges for Law Firms.
Increase Profitability & Compliance: Business Accounting
Make sure your accounting and billing workflows are seamlessly integrated to avoid double entry errors. Accurate records and fee income reporting will show you which practice areas, clients and attorneys are the most profitable and will allow you to see which areas should be encouraged for growth. Additionally, legal-specific income allocation should always be applied as your firm is paid to stay compliant, so be sure your accounting tool offers this feature.
Increase Profitability & Compliance: Events & Tasks
Make sure all billable items are billed and deadlines and essential tasks are accounted for. When everyone in the firm uses a different tool it can be difficult to make sure all deadlines are met. Streamline collaboration with your team and make sure all tasks are completed on time with automated task workflows and shared calendars through one system.
Certain programs, such as CosmoLex, can support the option to flag certain tasks as billable to ensure that they make their way onto an invoice. An alert will notify you if you fail to bill the task, making sure no billable hours slip through the cracks.
Increase Profitability & Compliance: Client Communication
All communication and data should be stored and shared securely, preferably through an encrypted client portal. Maintain a thorough communication log and if your software supports it, link all items (documents, emails etc.) to the relevant matter.
Save time spent on unbillable activities by setting up an automated document assembly process of commonly used documents that populate with matter data. This helps ensure that all documents are consistent and accurate.
Continued Growth & Efficiency
Evaluating profitability in order to better to the firm’s operations should be at the top of the priority list for any firm right next to compliance. Using the right software can help you address both while at the same time increasing your firm’s efficiency. This focus will provide a boost in your financial metrics while making sure you’re within the scope of required compliance.
To learn more about this topic, watch our full webinar on-demand 5 Ways to Control Compliance & Profits with CosmoLex.