While some lawyers only see practicing law as a profession, in reality, law firms are businesses, lawyers are business owners, and businesses need to be profitable. Large law firms have whole departments to assist with keeping law firms profitable (marketing departments, accounting departments, HR, etc.). And, while solo and small firm lawyers may lack these resources, there are still simple steps lawyers can take to measure, track, and ensure continued profitability for their firm or practice.
Get Out of the Day to Day: Look at the Numbers
Many lawyers get lost in the day-to-day legal work and fail to make the time to step back and look at the big picture. Lawyers can get too busy working in the business to work on the business, and when they finally look at the numbers they may be surprised.
It is beneficial for small firms to regularly review and track important financial numbers or key performance indicators (KPIs) for their firm. For example: revenue, realization rate, collection rate, account balances, accounts receivable, expenses, etc. Firms do not have to review these numbers every day, but it is helpful to take a close look at least once a quarter. Lawyers should ask themselves if their firm is as profitable as they want it to be. One way to keep focused on law firm profitability is to set clear goals for the law firm based on these KPIs and revisit those goals each quarter.
Once they are aware of the numbers, lawyers can look for ways to increase profitability. Some suggestions to consider:
Increase Prices:
One simple way to increase revenue (and, in turn, profit) is to increase fees. If it has been a significant time since the firm’s fees have been raised, and the lawyer feels it is warranted, simply revisiting the firm’s pricing structure is one easy way to address profitability.
Collect Money Owed:
Law firms should also keep an eye on any significant balance in overdue accounts receivable, because another simple step to increase profitability is to increase the firm’s collection rate. Lawyers need to set aside time to follow up on overdue accounts. Lawyers can also improve their collection rate by requesting an up-front retainer fee payment and having those retainer amounts replenished when they are depleted. Law firms should also make it easy for clients to pay an invoice. Consider adding credit card payments or e-transfers as forms of acceptable payment. Cheques may be an inconvenience to many clients. Also, firms can increase chances of being paid by invoicing on time (especially after a big win). Do not wait months before sending out the invoice. All of a lawyer’s hard work will be a distant memory and the client may not be as eager, or motivated, to pay.
Reduce Expenses:
Law firms can increase profitability by increasing revenue, but they can also improve their profit by decreasing expenses. Are there any expenses the law firm doesn’t need? Perhaps there are subscriptions that are no longer being used? Those small monthly amounts can add up. Maybe think twice before purchasing the expensive art work or custom furniture for the office. Do some research and comparison pricing before signing an expensive lease. At least once a year it is a good idea to look at expenses to see if any could be eliminated or decreased.
Automate Processes and Use Technology:
Another way to increase profitability is to automate processes to save time and run a more efficient practice. There’s a lot of technology available to assist law firms. For example, law firms can embed intake forms on their website to assist with automating client intake. Lawyers can efficiently track billable hours through time-tracking software. Firms can also use software to automate billing and invoicing to ensure invoices are sent regularly and on time and legal payment software makes it easy for clients to pay.
Focus on Highest Value Work:
Lawyers earn the highest revenue for the firm and therefore their time should be spent on high value work. This is important to law firm profitability. Lawyers should be delegating anything that is not high value, even in a solo and small firm setting. Can’t afford to hire full time help? There are lots of freelance services that can assist. Have the firm’s phones answered by a virtual receptionist. Engage a freelance social media manager to manage digital marketing. Hire a freelance lawyer to assist with legal drafting or research so you can work on other high value work like business development. Lawyers need to learn to delegate so they can work to their full potential and only complete tasks that 1) they enjoy and 2) only they can do. (Want more info on delegating? Download our free Delegation Guide here.)
Conclusion
While lawyers often focus only on practicing law, it is important to step away from the legal work and look at a law practice or law firm as a business. These simple steps above can help increase law firm profitability so lawyers can take home extra money, without working 24/7.