Lawyers can make a profit and save money by tracking numbers. It is more than just entering data into accounting software. By measuring certain things in your practice to determine if things are growing, are key performance indicators that can show which areas of the law practice may need work.
Health of a Law Practice – 3 Important Items
In the health of a law practice, it is important
to have a great system and software in place when tracking the following 3
items. Lawyers are busy and don’t have the time to make sense of the results
and need to spend their time practicing law, not calculating numbers and
drawing assumptions based on data. You should look at outsourcing all unrelated
law tasks or to avoid seeing a large decrease in profits.
1. Referral Sources: First, track where new clients originated from. Looking at how they found the law office: Facebook ad, on a billboard, by a referral? Finding out each source, the lawyer can improve and focus its advertising with ease, eliminating those tools that aren’t working.
2. Profitability: Second, the profitability of each situation. Good lawyers know how much they are charging but also how much profit they will make. After expenses are paid, what is left over will be the profit. You will want to have some sort of tracking system for this.
3. Realizations Rates: Third, realization rate which is tracking the money the lawyer collects from clients. Regrettably, there are times the lawyer get paid, say 15 hours, when invoicing for 20 hours. You need to consider this when reviewing your work. Realistically, we would expect the full amount due would be paid each time, but that would only be in a perfect world.
Making Sense of the Numbers
Hiring a bookkeeper is a
great way to make sense of the various numbers
these software programs produce. The bookkeeper will do the clarifying and
number collecting. Consider this, if it gets measured, it will get the appropriate
Lawyers are busy, busy people. Lawyers are busy in general by marketing, reading, studying, and most of all, they work on cases. Comparing a lawyer’s revenue with other similar lawyers is a great way to measure whether a lawyer is good at his job. To make the best profit and keeping clients satisfied, a lawyer needs to ensure he/she is maximizing both their time and money. It is highly beneficial when hiring an office manager, secretary, and a bookkeeper. Having someone in these each position will provide time for the lawyer to focus on the higher-level work that needs to be completed.
For practices that make less that take in one million dollars annually, it is a huge benefit to hire a contract bookkeeper. He or she will have the ability to answer questions and find financial information quickly. Many small law practices don’t have the need for full-time, on-site bookkeeper. Neither do they need to hire a CPA to do their weekly and monthly financial tracking.
Two vital pieces to the law office practice is hiring a great bookkeeper and tracking Key Performance Indicators (KPIs). These two key factors fit together as a bookkeeper can do the work of measuring KPIs.
The Income Statement, Balance Sheet, and Statement of Cash Flows
Based on the financial activity that flows through the law office, a great bookkeeper creates three special reports each month. She (or he) specializes in law bookkeeping in order to sharpen her knowledge of the special bookkeeping needs this area requires. The reports will be used to discuss with the lawyer the actual health of his practice.
Bookkeeping has developed to be more than just entering data into accounting software. A great bookkeeper will take the reports the software helped produce, and turn them into real, KPI tracking, result producing tools. The numbers can be reviewed by the lawyer and bookkeeper as to what they mean, and how to make them fit the practice the following month.
The Income Statement tells how much money was earned during a specific time period. This useful information will let you see the profit from the marketing and billing that was done over that same period. If the lawyer advertised on a highway billboard in March and made a higher profit that month over February’s profit, it can be determined that the billboard was a success. If there were a lot of expenses in the month of July, the lawyer can conclude that cost per matter is too high, and areas need to be review for cut backs.
The Balance Sheet tells the practice exactly what it owns, how much it owes, and how much equity it has at any specific time. Having a good lawyer (or even better, let the bookkeeper) compare the numbers, which can change from month to month, to determine how well the business is doing over time. A lot of unpaid invoices to vendors shows the lawyer that equity needs to be converted into paying debts. A lot of property/assets shows that cut backs on purchases may need to be done for a few months. When there is a lot of equity, it shows that the practice is successful, and should continue doing what it’s doing.
The Statement of Cash Flows helps
the lawyer see what money went into the practice that month and where the money
went – to investments, salary, and bills? You can determine if spending is high
in particular areas – spending too much on rent or certain expenses. This is a
useful report and will really give a lawyer the information needed to track
The bookkeeper uses these reports each month to help measure the health of the law practice, then has a discussion with the lawyer to inform them of the results. A lawyer needs to know the health “score” of their business just like a student in school needs to know their test scores. Partner with a great bookkeeper now to get your KPIs in place, and see outstanding profits next year!