Driving Profits Up
by Barbara Lewis and Dan Otto
(County Bar Update, June/July 2003, Vol. 23, No. 6)

Driving Profits Up

By Barbara Lewis, M.B.A., Law Practice Management Section Executive Committee, and Dan Otto, M.B.A. Lewis and Otto are partners with Centurion Consulting Group, which provides business consulting for law firms. They can be reached through their Web site at http://www.centurionconsultinglaw.com. The opinions expressed are their own.

At a time when law firms are squeezing every drop from potential revenues, profit builders can contribute to the bottom line.

One of the best ways is collecting what you bill. To ensure a high realization rate (the percentage of billed amounts compared to collected amounts), ask for a substantial retainer so that little money is at risk at the end of the engagement. Clients balking at the upfront retainer may portend future problems.

When collecting monies due, let your office manager or bookkeeper handle the task; your time is better spent billing, and it’s much more profitable for you. Calculate your average collection days -- Divide last month’s billing by the number of days in the month to yield your daily billing rate; then divide your total accounts receivables by your average daily billing rate to calculate the average number of days required to collect on your billings. This establishes a benchmark and allows you to set a goal. A good target is 45 to 60 days.

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.

Another way to increase profits is by cutting expenses. Closely monitoring monthly expenses and comparing them to the monthly budget can indicate areas where expenses are out of line. A review of line items in the development of the budget can reflect expenses that are unnecessary. No budget is perfect; however, the variances need to be explained and managed.

The largest expense for law firms is labor. Ensuring that the right employees are performing the right tasks and are working at capacity is critical for maximizing profit. Oftentimes, employees handle jobs for which they are overpaid. For example, the attorney’s assistant may be performing clerical work, and the associate may be doing paralegal work. Aligning tasks with the lowest paid competent person can increase profits. Delegation is the key when employees recognize that their tasks should be at or above their competency.

Salary payment method can contribute to profits. Paying employees a low fixed salary with a high variable or bonus that is based on performance standards and goals can go a long way toward motivating employees and reducing the firm’s risk of underutilization. Contract employees can save firms the expense of benefits and overhead.

Outsourcing can be another way to increase profitability. Bookkeeping, payroll, collection, photocopying, and telephony are areas that businesses outsource profitably.

Planning is more profitable than not planning. Business and law firm studies reflect that both strategic plans and marketing plans respectively can have a substantial impact on profits. In fact, law firms with marketing plans can nearly double profits compared to firms without plans.

The core of a marketing plan is the database. Firms with integrated contact databases containing financial information have a goldmine at their fingertips. Historical information on the industry of clients, referral source of clients, and types of matters plus trends in each of those areas over several years provides the foundation of the future marketing plan. Using past successes in marketing -- based on the data analysis -- can save time and money before trying marketing techniques and targets that may not work and degrade the firm’s profitability.

Average law firm profits are 33 percent prior to partner draws. Firms that continually drive profits by implementing profit boosting programs, however, can increase that amount substantially.

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