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Back in January 2017, I was having breakfast with a local lawyer when he said, “I think I need to raise my rates this year. I am just not making enough money, and raising my rates should make the year more profitable.”
This led me to ask, “Do you know how much additional money you would actually make by raising your rates?” Maybe raising rates was needed; maybe not.
Knowing where opportunities for more profit may be hiding in your business would be useful information to have at your fingertips. That breakfast conversation evolved into a yearlong project of tracking data that would help identify where the profit in the lawyer’s business was being generated or getting lost.
Whether or not raising his rates was needed, at least the data would be available to support the decision.
Many great articles talk about the importance of collecting data to know your business. But how many of us are really doing that? I hope the following helps you move closer to understanding the importance of collecting data to better understand your profitability.
What you choose to collect and track may differ from other firms, but not by much. For this project, we chose to group the data into three areas (which highlights the simplicity of the business of law):
To start, I recommend you choose a few of the following areas to track, then set up an Excel spreadsheet and add the data on a monthly schedule. Your practice management or accounting software should be holding all this good data. You just need to get it out and into your spreadsheet.
Basically, the data you’ll pull together here reflects what takes place so that you can actually produce monthly invoices.
Here’s what the spreadsheet might look like:
How many of the hours you captured are actually going on the client’s bill? Track these two items.
Total dollars invoiced/Number of hours entered = Your actual hourly rate
Using the example above, $20,000/130 hours = $154 per hour. See how quickly $200 per hour gets chipped away at?
Warning: Potential lost profit. Are expenses you incurred on behalf of the client getting on the client invoice and properly categorized in your chart of accounts? Do you have a process to review those costs and make sure they are included on invoices?
This is where you track the data surrounding how quickly you get paid and how much money you actually collect.
While focusing on the revenue side of the equation, do not ignore the expense side. You may discover things you had no idea you were paying for. Know your expenses — including your own salary and related items. This will keep you focused on paying yourself first.
Here are a few tips on how to get a better picture of your expenses:
A year has passed since we began the data collection project. The attorney now has all the data needed to understand his law firm’s revenue, expenses and profit.
In the end, a profitable law firm happens when you focus on getting and keeping good clients, doing good work and getting paid. Understanding your data allows you to make decisions that enable you to do just that.
Chris and Peggy Gruenke own CPN Legal, a law firm management consulting firm specializing in business operations, technology, law firm bookkeeping services, and trust accounting. Peggy writes on productivity and profitability for Attorney at Work here. Follow her on Twitter @PeggyGruenke.
Here are a few of Peggy’s most popular posts on Attorney at Work:
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Checklist | What do you need for a more efficient, tech-competent law firm in 2019? “8 Essential Technologies to Increase Your Firm’s Productivity.”January 26, 2019 0 0 0