How do I determine my law firm’s profitability?
Law firms can look at profitability, or how much the firm has earned after expenses have been taken out of total revenue, in a number of ways. The overall profitability should always be assessed, along with breakdowns by practice area, by matter and attorney.
Many practice management programs that integrate with accounting software can easily show you these numbers. However, you can also calculate these by hand or speak to your accountant about obtaining this information.
The firm’s general profitability can help make sure prices are high enough to sustain firm expansion while ensuring that expenditures aren’t excessive. Viewing the profitability in comparison to previous quarters, months and years can help show trends that be indicative of positive growth or a decline that’s cause for concern.
By practice area
Looking at profitability by practice area can help determine what areas offer room for growth, which areas may be consuming too much in terms of resources and expenses and where cutbacks need to be made.
Firms should assess how many hours are put toward a matter, what their costs are associated with the matter and the overall profit. Although it may seem like every case of a certain type will have the same profit associated with it, that often isn’t the case.
While not every attorney will bring in the same amount of profits, this is a good opportunity to identify future partners and to determine distribution models.
1. How Firms Should Be Measuring the Profitability of Matters
2. Profitability 101: What They Don’t Teach in Law School