Develop a System to Gauge Financial Winds
by MBA and MBA
The optimum way to manage any
business is to establish measurement systems that will track success indicators and
highlight areas for improvement. Finance numbers tell part of the story and
are the first place to start when determining the health of your firm and developing
The profit margin (gross
revenues minus expenses divided by gross revenues) is, on average, 30 percent among U.S.
law firms (before partner draw) and can be as high as 65 percent among small law
firms. At the very least, firms should aim for a 30 percent margin. The firm thats
operating at a 10 percent margin is doing something wrong. It may be overstaffed,
underpriced, or its expenses may be too high.
Expenses have a way of getting
out of hand unless measured on a monthly basis. The firm that is spending
over 80 percent of all expenses on salaries or over 20 percent on rent is probably paying
Revenue can be measured by
matter, referral source, industry of client, amount by client and many other ways
depending upon your goals. When one firm discovered a huge jump in revenues from a
specific industry and matter type, they successfully altered their focus to
capitalize on the trend. Only when a mid-sized firm saw that 50 percent of their revenues
were less that $1,000 per client, did they recognize that they were losing money due to
the high costs incurred by working with small clients.
Personnel ratios for law firms
assist in measuring how many staff, secretaries, paralegals and associates there should be
in relation to one partner. Three associates per partner is the about the best ratio for
optimal profits. Before computers, one secretary to one partner was the norm.
However, because many partners now work on their own computers, todays
standard can be as many as three partners per secretary.
Measuring the level of task
performed by each employee is critical for improving profits. Because computers have taken
over much of the work, today's secretaries are doing more filing and clerical work
tasks that could be performed by a lower salaried employee. Asking all employees to submit
time sheets for a typical week will determine whether making adjustments in who does what
could dramatically increase profits.
For some firms marketing is a
black hole. If youre not measuring where your new clients come from, you
cant attribute any to marketing. A database should indicate a referral source
or a "marketing event," such as a seminar, article, etc. for each client. Annual
or semi-annual analysis can reflect whats working and whats not in the
All the measurement systems in
the world will be wasted unless reports are generated that detail the numbers. A monthly
review of financial functions and a semi-annual review of operations and marketing reports
will ensure optimum management and influence the success of a firm.