As we move into the second quarter of 2021, take a moment to consider where your firm is at. What goals have been set, and how are you working to meet them? Which additional strategies might help bring you closer to those objectives?
If you’re not employing them already, these four strategies can help your firm increase profit—and set you up to meet your goals.
Monitor key profit metrics
First, you can’t measure the value or success rate of improvements if you don’t know the point you’re improving from. You need data to provide a complete picture.
Only then can you track revenue by practice area and lawyer, monitor utilization and realization rates, and know your overall financial trends. Key metrics let you know if the tweaks you’re making are working or not. They can also guide you in deciding where to implement changes, to begin with.
The idea of tracking metrics sometimes overwhelms law firms, particularly smaller ones, because it seems like a lot of time and work. But a modern practice management system can address those concerns by seamlessly gathering the data for you.
Overhead and income
When looking at your budget, don’t forget to balance overhead with income. On average, law firms spend half (or in some cases, slightly less) of their total income on overhead. Numbers, of course, vary by firm size, location, practice areas, client profiles, and other factors—so it is hard to draw exact comparisons.
Likewise, the methods firms use to calculate overhead varies, too. For instance, some firms include paralegal salaries or admin staff. Others don’t.
Even so, if your firm is spending 60% or more of your income on overhead, this is probably a good time to reevaluate. For many firms, the pandemic has likely prompted some reflection on real estate costs. And it has also ushered in more flexible working hours for staff—an oft-appreciated benefit that can help decrease employee turnover.
Firms can also adapt more efficient billing and accounting practices—such as integrated systems or bulk billing—to increase income by opening up more time for billable work.
Profit per case
Another way to look at both expenses and goals is by tracking your profit per case once expenses are paid out.
Once again, a myriad of factors make each firm different, so direct comparisons are hard to make. But most lawyers will want to work toward a 33% to 50% profit margin. For many firms, that will ideally look more like 40% to 50%—with the acknowledgment that 50% is hard to hit.
Having a sense of these numbers can help your firm understand essential details about what kinds of cases to take on. And if you’ve recently expanded into a new practice area, this data will be especially valuable.
The pandemic sent everything sideways and took a lot of the assumed predictability out of running a law firm. This means it’s more important than ever to ground decisions about how to spend money in the firm’s current budget—and resist counting on hoped-for increases in income.
That said, it also helps to have a vision of where you’re going, even if you’ve learned to expect the unexpected.
So while firms need to plan expenses for today’s numbers, they should also be looking at the upcoming pipeline of potential clients. Knowing if they’re expecting a slight dip in numbers—or a boost—can help direct planning and budget decisions, such as marketing approaches.
Reality is the present, but plans are a key part of your firm’s future. So analyze your metrics, adjust your budget, and work toward those goals for tomorrow.