What financial KPIs should my law firm be tracking and evaluating?
Key Performance Indicators, or KPIs, are critical metrics for evaluating company performance. They inform decision making and draw attention to areas that need improvement.
For law firms, KPIs:
- Monitor firm health
- Simplify decision making
- Record successes
- Highlight problems
Law firms can monitor KPIs to evaluate firm operations, business development and intake, performance and efficiency, and client satisfaction.
Of course, one of the most important measures of long term viability is a firm’s finances, and financial KPIs reconfigure these metrics to focus specifically on measuring a firm’s financial health.
Common financial KPIs include:
- Revenue billed
- Revenue collected
- Revenue per employee (or partner, practice area or matter type)
- Net income as a percentage of revenue
- Revenue per matter
- Anticipated annual costs
- Cash on hand
- Average net overhead
Not all firms will track all of these KPIs, but all firms should have some sense of profit margin and possess the information necessary to track expenditures. At a minimum, it is recommended that law firms track these important financial KPIs.
Net income as a percentage of revenue. Also known as profit percentage, this number measures what percentage of a firm’s revenue is profit. This KPI is calculated after all expenses have been paid, including employee salaries and partner shares.
Cash on hand as a percentage of quarterly operating budget. Cash on hand refers to the amount of cash available for use. Many firms aim to have between 30% and 100% of estimated quarterly operating costs available in case of emergency.
Realization rate. Realization percentage is the total measure of collected fees in a specific period over fees billed during that period. Realization rates vary across practice types, with government work collected at an average of 98% and bankruptcy law collected at an average of 72%. An overall target realization rate of 95% or more is recommended.
Accounts receivable over 30 days. This metric grants a high-level view of how much cash is currently owed to a firm, providing additional context for cash on hand and realization figures.
Labor percentage. This metric relates to overall payroll expense as a proportion of sales.
Ultimately, KPIs are a tool for measuring growth, establishing priorities, and evaluating any change in a firm’s performance. All KPIs are most valuable when measured at regular intervals to reveal performance trends.
1. Every Law Firm’s Guide to Key Performance Indicators (KPIs)
2. KPIs Law Firms Should Measure
3. Law Firm Data & Key Performance Indicators (KPIs)
4. Law firms’ average collection rates in the US