Are you hopping aimlessly through the week from client to client, putting out fires and hoping you can pay all the bills at the end of the month?
Are you working more hours than you would like and still not seeing your bank account grow month over month?
Your law firm’s profitability affects EVERYTHING and we’re here to help you get it right.
Do you know how much revenue you need to generate each day, week, or month to reach your profitability goal?
Do you even have a goal?
Hopping aimlessly through the week from client to client, putting out fires that arise along the way, and hoping you can pay all the bills at the end of the month is a sure-fire way to reach the burnout point, become dejected, and throw away all those “start my own practice” dreams.
In an ideal world, these important questions are being answered before you’re even open for business. But, we know it’s never that simple!
The good news is that it’s not too late to start.
The Keys to Establishing a Profitable Law Firm
Like with many things in life, getting started is often the most difficult part of the process.
If you’re neck-deep in client emails, backlogged work and hunting for a reliable office manager; thinking about financial planning can feel like a luxury. The truth is that it’s essential and has to come first, not last.
Finding profitability isn’t difficult, however, it just boils down to three things:
- Knowing your expenses inside and out;
- Choosing a revenue target; and
- Working diligently to ensure you meet it.
Now, that may sound a bit simplistic, so let’s break down how you do each of these things.
Know your Law Firm’s Expenses
Knowing your expenses requires setting up a spreadsheet, looking at your past bank statements, and being honest with yourself about your actual cost of operating your law practice.
There are a number of tools you can use for this instead of manually creating a spreadsheet. Quickbooks Online or Xero are relatively inexpensive and used by millions of people. There are plenty of others out there, but a big benefit with these is the size of the community around them. It’s easy to find high-quality assistance at a reasonable price.
We can’t stress enough the importance of developing good systems for your law firm from the start. Although we don’t run a law firm, we’re a young, growing business. We’ve gone through at least four different bookkeeping firms, a fate we would not wish on anyone.
Even if you’re an established firm, there’s still time to get things in order. After three years in business, we finally made a substantial commitment to get our books right.
It is essential to account for both the regular, recurring items (rent, phone and internet, etc.) and the variable costs of office supplies, insurance, bar renewals, and the like. Don’t forget to include taxes, transportation, legal research and document services, and anything else you pay for that keeps you in business. Start tracking your non-billable time and treat it as an expense. Having all this information at your fingertips can make it easier to see where you may be over-spending.
And it will make tax time a lot easier, too.
Spending that extra money and time to get our books right has made a world of difference in our business. We’ve moved from operating on our gut to executing a strategic plan. Instead of glancing at our bank account to see how we’re doing, we know exactly what numbers we need to hit.
Choose a Revenue Goal That Works for YOU
There are a lot of studies out there that demonstrate the bigger our goals, the more we achieve.
If your goal for this year is to make it better than last (not difficult for a lot of people as we kick off 2021), that may be enough. Or perhaps this is the year you want to scale from being a wear-all-the-hats-solo to having a contract attorney and full-time admin. Whatever it is, the important part is to know what the number is and to remind yourself of it regularly.
You’re running a business here, not indulging a hobby. If you set an annual revenue target, break it down so you can see your monthly, weekly, and even hourly number.
Don’t Neglect your Profit Margin
Perhaps, even more important than revenue goals are profitability goals.
You have more revenue than you’ve ever had, but your bank account is getting any bigger month over month. Sound familiar?
Adding new revenue can feel like a big win and it is. But, if you aren’t focused on profitability, it can be thoroughly depressing at the end of the month. All that work and no more money in your pocket can be depressing.
Having a simple profit margin goal each month will help give you a guiding metric as to how you’re performing as a business manager. To keep it simple, the basic calculation you should be using is:
Revenue (All Sales) – Expenses (Salary, Overhead, Software, etc.) = Profit
Of course, there are more advanced methods of calculating this, but there’s a shocking number of people out there who have no clue what this number is. We were one of them! Having a simple metric like this will allow you to think more analytically about your expenses and find ways to reduce them while maintaining service quality.
Now, we have set a goal of 20% profitability. Will we get there? Who knows. The important thing is that we are striving for it and taking steps to try and get there.
Execution is the Key to Reaching your Goals!
It’s easy to decide at times that things aren’t working, it’s too hard, or maybe that you’re just not cut out for running a law practice after all (you are, by the way).
The most important factor is as simple as deciding to go for it and not giving up. Jack Canfield, for example, the author of Chicken Soup for the Soul, had his book rejected over 160 times. Each time, he got over the rejection and kept at it. Look what happened… he’s now a multi-millionaire.
No matter what you perceive is getting in your way, it can be overcome.
If numbers aren’t your thing, don’t sweat it! There’s someone out there who possesses those skills and wants to help.
Once you decide you are going to give it your all, you’ll get there. Or at least pretty darn close.
It may require doing things you don’t “want” to do at times. It may mean contract work for a lawyer you don’t like very much, or a part time bartending gig while you’re just starting out or if things have slowed down.
If you think of every single thing you do as moving you closer to your goal, it will be easier to do just about anything you have to do.
If you find yourself doing things that aren’t going to get you to your target, then start asking yourself why.
Question whether it’s something you need to do at all. Don’t waste your time. It’s your most valuable commodity.
Getting to profitability may not happen overnight, but with the right foundation in place and a hawk-like observation of the numbers you need to hit, you’ll get there in no time.