Home Contact Us Feedback Site Map
Centurion Consulting Group
Market and Communicate to Grow Your Firm
Articles

Revenue Race Ignores Importance of Profits
by Barbara Lewis MBA and Dan Otto MBA

Recently, we had an opportunity to distribute a questionnaire to over 50 small law firms at the State Bar Convention. The survey yielded some interesting results about how attorneys manage their practices. This same survey was distributed at the 1996 State Bar. Here are the results of the 2000 survey and a comparison with some of the 1996 results.

 

Plan, Plan and Plan

Although planning is one of the best ways to increase revenues and profits, only 25 percent of the respondents have a written business plan and less – only 13 percent – have a marketing plan. Attorneys who don’t have written plans for their businesses are sacrificing profits. Research indicates that firms with marketing plans can nearly double profits compared to firms without plans.

In the 1996 survey, the results were reversed. Ten percent indicated that they had business plans and about 20 percent had marketing plans. Most attorneys don’t engage in one of the most basic business practices – developing business and/or marketing plans. Equally, important is the strategic plan with its development of the mission and vision and SWOT analysis (strengths, weaknesses, opportunities and threats). The strategic plan is the big picture view with the business plan and marketing plan built underneath to support the long-range goals of the strategic plan.

 

Retainer Fees

Requiring a hefty retainer prior to beginning work is a good way to ensure timely payment. Fifty percent of respondents said that they require at least 80 percent of the estimated fees prior to beginning work. Some attorneys indicated that they are uncomfortable asking for a portion of the fee before the work has started. Yet, clients who are reluctant to pay a retainer will probably cause problems when the invoice arrives. The time to find out about your client’s willingness to pay the estimated fee is before the work is started, not after completion of the project.

 

Timesheets

Nearly 100 percent of the attorneys capture their time on a daily basis. Those who don’t, run the risk of forgetting to bill about 10 percent of their time, according to research.

 

Invoice Format

Almost 60 percent of the respondents use time breakdown as a billing format, followed by about 30 percent who use a narrative format. Slightly more than 10 percent use a simple format. Research indicates that putting the due date on the top of the invoice as well as at the bottom where the amount due is located will accelerate payments. Attorneys need to decide which format is appropriate for their clientele. In some cases, a client may request a specific type of format that is not used with other clients.

 

Collections

Physicians don’t dun their patients and neither should attorneys collect from their clients. Yet, over 40 percent of partners claim that they call their clients about accounts receivables. That amount is down from 1996 when 50 percent of partners contacted clients about past due amounts. Attorneys should take a hint from physicians who don’t taint their relationship with patients by discussing money. A bookkeeper or a collection person who comes into the office for a couple of hours a week or month is probably better and more efficient at collection. Generally, attorneys don’t like to collect money and, usually, aren’t good at it.

 

Accounts Receivables

Less than two thirds of law firms track their accounts receivable aging and less that one quarter calculate their average collection days. Yet, poor collection of past due accounts can reduce revenues since a dollar today is worth more than a dollar three months from now. (To calculate your average collection days divide last month’s billing by the number of days in the month and divide that amount into your total accounts receivables.) The average law firm collection days is 120, which is poor business practice. A good goal is 45 to 60 days.

 

Profits and Margins

Surprisingly, less than 30 percent of respondents track their profit margin (revenue less expenses divided by revenue) Less than 45 percent know what their operating profit is. These same statistics were reflected in the 1996 results and emphasize a common problem in law firms: attorneys chase revenues and pay little attention to profits. For example, $100,000 in revenues with $90,000 in expenses is much worse than $40,000 in revenues with only $10,000 in expenses. In the first example, the profit is $10,000 and the margin is 10 percent, whereas in the second example the profit is $30,000 and the margin is 75 percent. Although the average law firm profit margin is 30 percent before partner draws, small law firms can generate in excess of 60 or 70 percent profit.

 

Expenses

Less than 15 percent of firms compare their expenses with the average expenses for other firms. One of the best ways to recognize if your expenses are within an acceptable range is to monitor the expenses of other firms your size.

 

Personnel Ratios

Less than 20 percent of respondents scrutinize their personnel ratios, such as number of support staff for each billing person. In comparing these ratios to other firms your size, you can determine if you’re operating an efficient firm. For example, partners who can support three associates with their work are operating among the top leveraged firms in California and the U.S. If you have one partner to two associates, the ratio is still good. If a partner can’t throw off enough work to keep even one associate or paraprofessional busy, then the partner is probably not marketing effectively. The consequence is that the partner is generating fewer profits since the general rule is that one third of associate’s fee generation is for his/her salary, one third is for overhead and one third is profit.

 

Overall results of the survey reflect that many attorneys are still not operating their law practices as businesses. Foundational business concepts are sometimes misunderstood and oftentimes not incorporated into the operation of the law practice. With a basic understanding of a few business metrics, attorneys can conduct a more efficient and profitable business.

Home | Contact Us | Feedback | Site Map | Articles | About Us | News
General Information Email: Centurion@CenturionConsultingLaw.com
Telephone: (818) 784-9888 Fax (818) 788-9825