Running a business requires frequent tinkering with the balance between expenses and income. And yes, a law firm is a business.
So, how much should your firm be spending on staffing and general overhead?
Understanding overhead costs
Among law firms, overhead generally refers to expenses minus attorney salaries, and sometimes minus paralegal salaries. Overhead can include everything from the office in which you meet with clients to the tech you use to turn your home into an office while working remotely during the pandemic.
And while it’s generally true that you don’t want to spend too much on overhead, it’s also true that you sometimes need to spend money to make money. For instance, it’s commonly understood that a marketing budget is an essential part of any firm’s expenses—after all, it’s how you grow your business and keep clients coming in the door.
Likewise, it may be worth dedicating some of your overhead toward tools that help save you valuable time on administrative tasks and earn you more hours for billable work as a result.
Time-savers like batch billing, automated overdue reminders, or integrated time trackers may notch up your overhead, but should earn you back far more than you spend.
The team is the firm
A similar understanding, of upping certain expenses to build long-term gains, is also necessary when it comes to staffing.
To calculate how much you should spend on staffing, you need to balance what it costs to retain good people (and not have to keep training new ones) with what you, as a firm partner or owner, need to earn.
For law firms, the profit margin is essentially the firm partners’ earnings. So, after you’ve covered all your expenses, how much are the firm partners walking away with? A good profit margin for a law firm is thirty-five to forty-five percent. You can use this ballpark percentage to determine how much you should spend on staff and overhead.
But know that especially if you’re just starting out, growing, or going through some restructuring, the need to tinker, calculate, adjust, and calculate again is normal. This is a dynamic process, so even once you think you’ve got it figured out, don’t expect everything to stay the same.
One final note to be aware of as you make adjustments is that it can be helpful to understand financial patterns. A good practice management system can provide you with valuable data to review metrics and analyze recurring patterns — building a better understanding of your firm.