Do you really know how profitable your practice is?
Do you know which factors are most important to your profitability?
For a surprising percentage of lawyers and law firms, the honest answer to each of these questions is "not really." They are practicing law in the dark.
It is not surprising that they frequently stumble over obstacles and fall into holes that other law firms easily avoid.
One of the basic steps in improving the profitability of a firm, a practice group, or an individual partner's book of business is to ensure that every partner has the information that he or she needs to answer those two critical questions at the top of this article. Even the smallest practice has the data needed to generate simple, but very useful, measurements of financial performance. For example, these include, but are not limited to:
- fully-loaded operating cost per lawyer hour recorded
- effective pricing and yield per lawyer hour recorded
- unbilled work in progress
- fee earner productivity
- realization rates
- accounts receivable
Merely sending this information to the partners is not enough. It has to be read. Each partnership must reinforce a cultural value of the ethical obligation of each partner to read and understand the reports and to take action in response to them.
These six measurements are not the only ones that can provide valuable information about the financial health of a law practice; but together they are an excellent starting point. They are especially powerful diagnostic indicators. Although the absolute value of each of these measurements is important, sometimes the changes in them can be the first warnings of a possibly serious vulnerability in the financial management of a practice. This is why we urge our clients to watch closely for significant changes -- both good and bad -- over the course of several months and to investigate the possible causes. This is one of the best ways, for example, to reduce the risk of a cash flow crisis three to six months in the future, as well as to avoid year-end disappointments when it is time to distribute profits.
Click here for more information about Walker Clark's services to improve the profitability of any law firm or practice group.