The Best Way for Law Firms to Increase Their Profitability in 2021
If you want to increase law firm profitability, you have to track it relentlessly and share the results of your analysis widely.
Although profits-per-partner has become a widely known metric for large law firms, most smaller firms don’t track profits assiduously. There is a world of difference between having your accountant calculate profits at year’s end for tax purposes and measuring profits on an ongoing basis for use as a decision-making tool.
Here are five elements of financial planning that your firm can implement to increase profitability in 2021.
- Start tracking revenues and expenses by practice area. This will allow you to run year-to-year comparisons and identify which people and practice areas are doing exceptionally well or underperforming.
- Create quarterly revenue goals by practice area and, if applicable, by office. And put these in writing.
- Use a consistent measurement, like full-time equivalent (FTE), to allocate overhead among profit centers.
- Communicate, on a regular basis, the firm’s progress toward meeting quarterly goals. As consultants to law firms, we have seen how weekly reports to partners can be easy to ignore; monthly reporting tends to work best, especially if the firm engages in meaningful discussions about the results.
- Create a marketing budget that is aligned with your revenue goals. Too often, the marketing plans prepared by individual lawyers (assuming they are asked to prepare such plans) are nothing more than rehashed versions of prior years’ reports. Instead, focus on each marketing activity in terms of its potential profitability. This will help you to avoid one of the biggest problems facing law firms – a lack of investment in effective marketing.
Understandably, lawyers are drawn more to growing their books of business than to worrying about boring accounting principles. When, as now, law firms, clients, and their vendors might be receiving government loans, it is especially important to be able to determine how your business is actually performing. More than ever, you should focus on profitability.