Whether you plan to start a new law firm or restructure an already existing one, profitability analysis can be a huge challenge. For example, it may be difficult to decide between billing per hour and charging a flat fee. Also, there’s always the question of whether you’re charging too much or too little for your services.
The good news is that you don’t have to be a financial wizard to figure out your firm’s profitability metrics. These tips will help you make the right decision for your law firm’s profitability by calculating and converting your time and productivity into the money you deserve.
Difference Of Profitability And Revenue Law Firms Make
Before going too deep into the topic, it is important to have a clear idea of the topic you’re working on. For most business, they’re already quite familiar with revenue. For law firms to become successful, it is vital for them to gain quite a number of revenue. Even so, some people do not know that revenue and profitability are two different things.
Revenue helps a lot when it comes to having the law firm boosted, however, if we are to focus on future, long-term profits, then success would depend on the increase of your firm’s net profits. If you’re increasing revenue without increasing profitability, you’re leaving money on the table.
If you’re looking forward to maximizing the law firm profitability, then firms would need to first balance maximizing revenues with minimizing costs.
How To Improve Law Firm And Stay Profitable
Such as with any other business, you need to make sure that you look carefully at whether the law firm has a healthy return on investment (ROI) in order to turn or remain profitable. If there are any issues, then be sure to adjust depending what is profitable for you.
With all that said, you can make sure that you’re following best practices, methods and techniques when it comes to the law firm’s processes as well as tracking those efforts. Additionally, these firm processes include your firm’s operational, billing, and collection rate efficiency. In addition, take a look at your law firm’s goals and stay focused on them.
5 Steps to Pricing Your Legal Services
Pricing your legal services is crucial to your law firm’s profitability. Typically, it communicates a lot about the quality of your services to your clients and determines whether they’ll hire you. Unfortunately, many law firms still struggle to find the most appropriate price tag for services they offer and are never sure whether their prices attract or repel potential client partners.
Here’s what to consider when coming up with prices for your legal services:
Thinking About the Product You Are Offering
You need to start thinking of your services as a product. For example, consultation for legal advice and client representation are two different products. Additionally, you’ll need to identify your niche for clients to understand the kind of services to expect from you. Eventually, you can decide to group the services differently and attach the fees for each package.
Determining Your Law Firm Success Revenue Model
The revenue model is determined by the firm’s operational requirements and market demands. These two factors play an important role in choosing the firm’s business model and cash flow structure.
For instance, if the firm is often busy and incurs huge operational costs daily, it’ll require a steady cash flow to sustain its operations. With that in mind, it’s easier to determine whether to bill per hour, have a flat fee, or charge contingency fees.
Additionally, it’s important to note that client cases vary, and a single revenue model may not suit all cases. Clients may also have their own preferences that may determine if they should hire a firm’s services. However you choose to bill, it’s important to use a proper legal case management solution (such as Rocket Matter) that can support these different billing options.
Considering Your Customer Acquisition Costs
The growth of a business depends on the conversion fee of its marketing strategies. Similarly, a law firm makes profits from the number of customers served. This means that the firm has to adopt a marketing strategy and assess how well the strategy sends valuable traffic back to the firm. Therefore, the Customer Acquisition Costs shouldn’t exceed the profits generated by the client partner acquired.
Identifying Your Case Value and Customer Lifetime Value
The Customer Lifetime Value (LTV) is the business value a customer brings to the firm over their lifetime as a client. This metric is important because it helps identify cost-effective strategies for maintaining existing customers and acquiring new ones.
Calculating a client’s LTV also helps assess whether the revenue model used to bill the client is profitable over the lifetime. For example, a flat fee per case may not fetch the same revenue as hourly billing over a client’s lifetime. However, the two revenue models may not be interchangeable between different products a firm offers, but their LTV will help the firm decide on which product and market to focus on.
Having An Understanding Of The Fixed Costs
The firm’s expenses also impact the general profitability metrics. These expenses are often described as operational costs and may include office rent, technology costs, and support staff salaries. After all, the net law firm profits of a business is the difference between its revenues and expenses.
A business that masters how to reduce operational costs without straining or compromising the quality of its services will always record higher profits. The same case applies to a law firm.
For more information on reducing operational costs, see: How to Reduce Your Law Firm’s Overhead Costs and Still Be Productive
Cracking The Numbers
The real number cracking begins after outlining all the factors mentioned in the guide above. The first metric to calculate to help learn with your law firm profitability is the Customer Acquisition Costs (CAC) which determines the total cost of serving client partners, including advertising and marketing costs. Most importantly, customer acquisition costs should convert to clients who ultimately bring in money into the firm.
The Customer Acquisition Cost then converts into the Lifetime Value of each customer acquired. Basically, you can find out if the CAC converts into the intended profitability of the firm in both long-term and short-term projections.
Client LVT is determined by the difference between the revenue and labor cost to determine the profit law firm success margin. Depending on the number of transactions between the customer and the firm, the profit margin projects how much profit the firm will make from one client.
Finally, the firm keeps the net profits it attains after deducting all its operating expenses.
Interpreting The Number Metrics
Each of the metrics calculated has an impact on the profitability of the firm. The based figures help strategize work the business activities and point out the key performance indicators to increase law firm watch profits.
Here’s how to interpret these numbers.
CAC Recouping Rate
The CAC recouping rate determines how fast the attorney company regains the customer acquisition costs while serving the accounting client. This rate derives from the CAC and profits per transaction (per case or service).
The most desirable recouping rate is characterized by a shorter recovery period. If the firm takes too long to recover its costs, it may need to restrategize work its target market.
Return on Investment
Every business would like to have a strong ROI (return on investment), especially over the long-term period. For example, the ROI in a law firm derives from dividing the Client Lifetime Value and the Customer Acquisition Cost.
A strong ROI means that the business excels in acquiring more clients. It’s also possible to rank the type of clients that convert into the strongest ROIs. As a result, future CAC investments would target such clients to improve on the firm’s ROI.
Scalable Business Model
In general, these law firm profitability metrics provide a clearer picture of the firm’s variables such as profit margins, income before tax, annual revenue, direct costs, number of clients or cases per year, and so forth. Thus, such figures are essential for proper company planning, reporting, and even abiding with tax compliance and certification requirements.
Things To Keep In Mind
Stay Focused To Your Time Goals
When it comes to any businesses, not just law firms, it is always a great idea to have a set of general intention, or some sort of goal of “increasing law firm profits,” however, do remember that making vague goals are more likely to bring vague results and may not be all that effective. If you’re thinking of being completely serious when it comes to your law firm profitability, then you can proceed to creating a SMART strategic goal.
SMART is an acronym based on specific, measurable, achievable, relevant, and time-bound. Be sure to research more and choose a fitting effective goal for your law firm. Defined, SMART goals do more than just give you and your team focus and accountability. With all things considered, a good goal provides a target to successful measure your law firm billing progress.
Utilizing Legal Technology
When it comes to boosting and increasing profitability, it would be a nice and more efficient idea to deal with tools and legal technology in order to assist your law firm. In fact, many businesses uses multiple tech and tools in order to maintain a low cost as well as save some of your time.
Apart from increasing profitability, you can also improve your revenue by using legal technology. They can help law firms by allowing them to run more efficiently, streamlining processes, and making it easier to bill and collect on invoices. Legal technologies are already convenient by itself, however, it works more effectively and more valuable when there are times of crisis.
With that said, you should remember that the amount of efficiency and profits the legal tech work offers will depend on your due diligence. You should also remember that there are many technology alternatives where you can choose from. Be mindful as you may be enticed to choose all that home page english you come across from.
Even so, you want to be strategic and choose tech that is as secure as possible and addresses the specific issues your law firm deals with if you want to use the technology to it’s full potential. Choose one that fits entirely to your company’s needs.
Maintain A Healthy Cash Flow
As for your firm’s financial survival and profitability, it is vital that a healthy cash flow is obtained. If your firm’s billing cash flow needs a boost, there are numerous options to consider. For example, you can look for ways to reduce expenses, follow up on unpaid invoices, or make it easier for clients to pay you with online and alternative billing payment options.
If you’re spending a good portion of your day on non-billable tasks, then you’re missing out on potential revenue and undercutting your law firm’s profit potential. There was even a report that pretty much says lawyers dedicate an average of just 2.5 hours per day on billable work. Apart from that, it also ensures that most lawyers’ work are indeed missing out on potential profits each day.
Using technology to automate essential. But non-bill-able administrative tasks like client intake, practice management, time and billing expense tracking, legal billing, and more saves you time and effort.
Law Firm Profitability- The Bottom Line
For the bottom line, a law firm’s profitability depends on Customer Acquisition Costs and Customer Lifetime Value. These two metrics determine how well the law firm survives the industry’s different challenges to obtain a longer-lasting market presence. Without them, the business may not be able to sustain itself long enough over a few years.
Looking to run a more profitable law firm? Take the first step with our best-of-breed legal practice management system. Schedule a personalized demo today to see it in action!