What is Your Firm's Profitability?
What is Your Firm's Profitability?
By Barbara Lewis, MBA, Law Practice Management Section Executive Committee, and Dan Otto, MBA. Lewis and Otto are partners with Centurion Consulting Group, which provides business consulting for law firms. The views expressed are their own. They can be reached through their Web site at www.centurionconsultinglaw.com.
Average law firm profits are 30 percent prior to partner draws. If your profit margin is not at least that amount, it's time to implement some steps to improve profitability. While 30 percent is a minimum, some of our small law firm clients have profits in excess of 65 percent! You should calculate your profit margins and track throughout the year. (Profit margin is revenues less expenses divided by revenues.) In a recent survey that we conducted at the State Bar Convention, nearly 30 percent of respondents did not know what their profit margins were, and less than 45 percent knew what their operating profit was.
Cash is king, and so good cash flow is critical. Yet, the number one problem we find in law firms is high accounts receivables. Poor collection of past due accounts can reduce revenues since a dollar today is worth more than a dollar three months from now. (To calculate your average collection days, divide last month's billing by the number of days in the month, and divide that amount into your total accounts receivables.) The average law firm collection days is 120, which is poor business practice. A good goal is 45 to 60 days.
Physicians don't dun their patients, and neither should attorneys collect from their clients. Attorneys should take a hint from physicians who don't taint their relationships with patients by discussing money. A bookkeeper or a collection person who comes into the office for a couple of hours a week or month is probably better and more efficient at collection. Generally, attorneys don't like to collect money and, usually, aren't good at it.
The format of the invoice can enhance collections. Research indicates that putting the due date on the top of the invoice as well as at the bottom where the amount due is located will accelerate payments.
Requiring a hefty retainer prior to beginning work is a good way to ensure timely payment. Some attorneys may be uncomfortable asking for a portion of the fee before the work has started. Yet, clients who are reluctant to pay a retainer will probably cause problems when the invoice arrives. The time to find out about your client's willingness to pay the estimated fee is before the work is started, not after completion of the project.
Although planning is one of the best ways to increase revenues and profits, most attorneys don't have a written business plan or a marketing plan. Attorneys who don't have written plans for their businesses are sacrificing profits. Research indicates that firms with marketing plans can nearly double profits compared to firms without plans. Equally important is the strategic plan with its development of the mission and vision and SWOT analysis (strengths, weaknesses, opportunities and threats). The strategic plan is the big picture view with the business plan and marketing plan built underneath to support the long-range goals of the strategic plan.
Incorporating a few foundational business concepts into the operation of the law practice can increase profits and profit margins.
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