Crucial Financial Figures to Boost Your Law Firm's Economic Success
In an insightful article penned by Molly Hall McGrath, Brooke Lively, Founder and President of Cathedral Capital, shares a method for law firms to increase profitability. Lively's approach involves tracking six essential metrics: Cash Flow, Owner Compensation, Accounts Receivable, Productivity, Billing & Collection Turnover, and Profit Margin.
By understanding these key business numbers, law firms can gain valuable insights into their financial performance, billing efficiency, and profitability. Each metric provides a piece of the larger financial picture, aiding in proactive management instead of reactive panic-based decisions.
Revenue Per Lawyer is a crucial metric that measures how much income each attorney generates for the firm. This helps assess attorney productivity and informs staffing decisions. Billing & Collection Turnover tracks how quickly invoices are sent out and payments are received, improving financial stability and helping identify billing process issues.
The Profit Margin, a percentage of revenue left after all expenses are covered, provides a clear view of the firm's overall financial health. Realization Rate, the amount billed as a proportion of the number of billable hours worked, evaluates billing efficiency and pricing strategies. The Collection Rate, the amount collected as a proportion of the amount billed, indicates better billing and client management practices.
Monitoring Accounts Receivable (AR) Outstanding and Age helps manage cash flow and identify potential payment issues with clients. Productivity should be measured by comparing the revenue generated by each team member to their cost.
Brooke Lively's method led to a significant change in her own company. In 2015, she fired her biggest client, who made up 94.3% of her company's revenue. This decision led to 26 consecutive months of financial losses for her company. However, the experience taught Brooke that lack of information is the root of anxiety and that treating her company like her clients' businesses, using key business numbers, was necessary for survival.
Additional resources for law firm growth, leadership, and profitability are available on the website. Weekly podcasts with legal experts are also available for further conversations on the topic. Insights on key business numbers can be found on the blogs. By embracing this method, law firms can take control of their financial health and achieve profitability.
By applying Brooke Lively's method to their business operations, law firms can not only improve their profitability but also gain a comprehensive understanding of their financial health. This approach encourages proactive management of key business numbers, such as Productivity, Profit Margin, and Personal-Finance metrics, which can significantly impact a firm's stability and growth.
