If you own a law firm, you’ll know that it isn’t just about making money, it’s about keeping it. Have you noticed your business has strong revenue but you’re not seeing a significant profit? If your profits aren’t approximately one-third of your revenue, there might be a fundamental imbalance in your business model.
A common business model should be split into three parts.
However, with law firms, the model can vary. Here’s how.
It’s necessary to pay your team in accordance with industry standards. To keep operations running smoothly, overhead and administrative costs are necessary expenses too. Ensuring your business is not just surviving but thriving means one-third of annual revenue should be your profit at the end of the year.
For law firms the model should look more like:
40% direct salaries, contracts, and other labor costs
25% overhead and administrative costs
35% profit
Does this represent your firm? If your bottom line doesn’t reflect 35% profit, it’s time to discover why. Here are some items to reflect upon:
- What percentage of billable time is each individual contributing to the firm?
- Determine where bottlenecks exist in the firm. How do you work to alleviate these bottlenecks?
- Analyze both fixed costs (rent, utilities) and variable costs (materials, marketing). Are there areas where you can cut back without impacting quality or efficiency?
- Do you have the right processes in place to make your office run efficiently? Are some processes outdated?
- Asses who perform each administrative and non-billable task. How can you realign tasks to enable certain individuals to maximize their billable time?
The key to this model is that it can help you evaluate company performance in addition to optimizing your profits. The tricky part is understanding how to do it right for your firm as the path to success can vary.
Here’s an example.
As a partner, Jacqueline was having a challenging time responding to clients. By taking a look at their business structure we determined a few things.
- Partners were spending too much time working on files that didn’t bring a high return. We identified ways in this area that would improve efficiency in their firm.
- There was a bottleneck where partners were holding up the billable hours due to tasks that could be easily passed on. By addressing this, client relations improved as partners had more time to spend with their clients.
- The business model was broad at the top with partners doing 70% of the work for clients. By adjusting the model to be deep and narrow, their time was freed up to focus more on billable hours. This improved profitability.
The first step to identifying an imbalance is to review your financial records to determine your profit as a percentage of revenue.
The next step is to determine your billable time and billable rate for each individual and measure that against expectations and industry standards.
The third step involves assessing the efficiency of all your office processes and assigning tasks to the right individuals.
These first three steps are critical to the success of your firm and are required before attempting other strategies.
A profit of 35% can vary from one firm to the next depending on environmental factors, location, field of law, and competition. However, it is an excellent metric to measure how your firm is performing. If you find that your profit is significantly lower than 35% of revenues, it’s time to talk to an expert.
At Crescendo Accounting, we specialize in helping law firms achieve sustainable profitability.
Here are things we can do to get a firm operating at a high level:
- Do a discovery session to determine the most urgent need.
- Create and document standard operating procedures for your office.
- Analyze your profit ratio and help determine where the major issues are if it is below industry standards.
- Provide guidance in creating an efficient deep and narrow team that does not rely on the partner(s) to support every team member.
- Develop KPIs and processes to monitor them to ensure the long-term success of your firm.
- Provide bookkeeping services that ensure compliance with the regulations set by the law society and the filing requirements of the CRA.
- Provide on-going financial advice as required throughout the year.
- Prepare and file all your end financial statements and corporate and personal tax returns to ensure CRA compliance. This includes optimizing tax strategies for you.
Is it time to get the most from your law practice? Contact us today.
About Crescendo Accounting
We are a trusted accounting practice in Calgary for over 20 years. Our services for law firms include Corporate Tax Accounting, Bookkeeping, Payroll Management, Fractional CFO Solutions.
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