Know Your Profitability
Getting real with your numbers can be a difficult journey. What you think is going on financially in your firm can come into question very quickly once you crunch the numbers and they’re staring you in the face. We love the numbers because they don’t lie. There is no opinion and no bias, if the numbers don’t add up they simply don’t add up. Which is also why they make for a great scapegoat. “Sorry Mr. Sales guy, my marketing budget just won’t allow me”.
The first step to understanding your firms’ profit is to figure out where it’s coming from. Equally important is how much it costs to bring that revenue into your firm. This (Revenue – direct costs) is your profitability. Don’t make the mistake at stopping at the money part of this analysis, you also have your time and the time of others to consider. After all they have said that time is money, right?
You should know what your most profitable services are. This doesn’t mean vaguely knowing that 50% of your work comes from case type A, and the rest is a spread between case types B-E. It means being specifically attuned to how much time and money it costs to generate X amount of dollars from each case type. Often overlooked is the admin time spent on each case type. You should know how many hours and from who are attached to each case type.
Here’s an example which takes into consideration the team’s time and all the associated potential costs of a given case type.
Practice Area 1 in our example above brings in $3k in revenue per case, costs $996 in wages, $425 in expenses, leaving $1,579 after all is said and done for the firm to absorb. The total hours spent on this case type is about 9 hours start to finish which yields about $175 per hour to the firm.
Practice Area 2 brings in $5k in revenue, costs $654 in wages, $900 in expenses, leaving $3,446 in the firm. Total hours spent was only 6 and equates to about $575 per hour.
You can quickly see here that the most profitable work this firm churns out is in practice area 2 and it even takes less time to generate the revenue. If this was your firm, what would you do? Focus your attention a little, right?
Once you know your revenue formulas you can forecast upcoming cash influxes, and the time demands it will place on your team. This provides you with a heightened financial awareness. In many cases this type of detailed evaluation across all case types can lead to some strategic changes in the firm’s direction and internal processes.
When you know better, it’s your responsibility to do better.
Now, go do better legal warriors!
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