Top KPI’s for Law Firms
You have elevated your practice to a new high. You've taken the time and effort to specialize in one area, and you have chosen the legal industry. Maybe you have even micro-niched to one specific practice type. Congratulations!
Where do you go next? How do you stay ahead of commoditized bookkeeping? How do you stay ahead of technology's curve or at least minimally figure out what works best with implementing technology?
Have some fun while you're at it!
I had to have a good fortune over the past few years to have experience working with the larger law firms. It is a pretty exciting mix because I think you need to have exposure to the smaller firms growing and that larger firm that is also expanding differently. Analyzing the smaller solo practice is much different from studying a larger firm. With more mid-market law firms, there are multiple personalities to work with, which adds more challenge to satisfying everyone. You always have to figure out who is the lead dog or, as I like to remind them, "the person who drew the short straw and has to deal with all the financial tasks."
How do you analyze?
Take a high-level view of the books. I always start with the balance sheet because that is the lifeblood of any firm. It tells the firm's story over the years, unlike the profit and loss, which is a snapshot of the current year. Look at all the loans and any debt on the books; look at the held assets. And I do feel like a broken record here, but analyze accounts receivable and accounts payable. Accounts receivable tend to be out of control in most firms that engage with me. Helping them with better work processes here will help with cash flow. Run that cash flow report. Remember, "Cash is King," it's critical to a healthy firm.
Take a look at the profit and loss run a comparable. Ask questions.
KPI's or key performance indicators can become significantly powerful. Like a kid in a candy store, do not over analyze. Pick a few and go from there. Here are my top KPI's for law firms: Here are a few of the KPI's I recommend tracking:
1. Cash on hand/cash flow
If your client has a hefty invoice that doesn't get paid, can you pay your bills next month? I like to see a client having a minimum of one month's cash available to pay bills. It is essential to start saving money when cash flow is abundant to keep for these times when there is an economic downturn.
2. Profit percentage to revenue
Use this to benchmark with other businesses within the industry. If your business is healthy, this number must be positive. Healthy percentage 10-15% range.
3. Track accounts receivable over 30 days
This KPI is the total number of invoices to open accounts receivable. The goal is 0%. Businesses with low cash flow tend to be notoriously bad at chasing outstanding invoices over 30 days.
4. Labor percentage or total labor cost divided by total revenue
The total labor cost in a law practice is typically the most considerable expense. How much is that? Can you grow and add to your staff? I like to see this KPI at 30%. Are you getting sufficient production out of your team?
5. Realization rate
This one is harder to calculate. I look at how much was spent this month and how much was collected? In a perfect world, I'd like to see 100%, but this is not the case in the real world. Also, check how much has been written down.
Adding these skills to your accounting practice will make you shine above the typical accountant that works from that historical lens. Find that way to be that expert in the legal industry, the specialist, when working with attorneys.
When you have conversations, you will speak their language. Spark a dialogue between the partners. Have them engage with you. The excitement around analyzing data occurs with more extensive firms as they are more open and inquisitive. There's something about that group mentality that makes decision making easier. But it's our job to start the conversation and have that partnership with the firm. Letting them know we have a vested interest in the growth of their practice too.
By changing my firm to only servicing the legal industry, it's almost made me feel like I have something new, something exciting. I enjoy studying the industry, attending webinars and podcasts, hearing their pain points, and figuring out how I can help. Nothing makes me smile more when the attorneys come to us and ask for something that's not accounting-related, but they know where that go-to person is on top of technology and automation. That's the person I want to be!
How about you?
If you are an attorney facing some of these same challenges, we can help. Contact us today so you have a brighter future tomorrow!
If you’re an accountant or bookkeeper and need more direction or education, please join our Facebook group QB Community Live! It’s a safe place to ask any question. I co-admin group, and I’m here to help. Our motto is, Together We All Succeed! #TWA$
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