When it comes to financial performance most small to mid-size law firms know their ABCs: accounts receivable (keep ‘em low!), billable hours (keep ‘em high!), and collections (100 percent would be nice!).
But true financial intelligence – and the success that flows from it – requires more. It is not enough for firms to zero in on a snapshot of these three predominant measurements of financial success because, while important, they only tell part of the story.
...what is too often lacking is a forward-thinking, strategic plan that goes markedly and meaningfully beyond “What have we billed? What have we collected? What are we owed?”
Imagine yourself driving a car but only able to see what appears in your rearview mirror; no forward view of the road beyond, no speedometer, tachometer, gas gauge, navigation system, compass, thermometer, park assist ... you get the picture. You might have a pretty clear sense of where you’ve been but where you are headed and the hazards that lie up the road are anybody’s guess.
Likewise, a law firm may have a highly competent bookkeeper, accountant, controller, or even a chief financial officer to serve the essential role of digesting and presenting a firm’s past financial performance to leadership, but what is too often lacking is a forward-thinking, strategic plan that goes markedly and meaningfully beyond the “What have we billed? What have we collected? What are we owed?” paradigm that inevitably leaves you one step behind.
The good news for you, as the managing partner, is that you can take advantage and utilize what your C-level colleagues in the corporate realm do to gain the essential “financial intelligence” your firm needs to meet its full profit potential. Fortune 500 companies have long relied on sophisticated financial tools to chart their financial success, and those same tools can be scaled and applied to small and medium-sized law firms.
But before you can put those tools to use you must stop seeing your law firm as just a practice and start running it as a business – a profit-driven entity with a forward-looking vision and a realistic, operative plan for success. Consider whether you can answer the following questions in confident detail:
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What has been the profitability trend of each one of your practice areas over the last three years?
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Do you have an actionable plan to “fix” the weaker practice areas and enhance the stronger ones?
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How do you optimize pricing in response to the increasing demand for alternative fee arrangements?
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What is the revenue loss associated with discounted billing hours and rates? Is there an upward or downward trend?
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How will a potential departure of a partner impact bottom-line profitability?
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What is your firm’s financial outlook for the next six to 12 months?
A managing partner who cannot answer these questions will never break out of the all-too-common cycle of perpetually playing Monday-morning quarterback.
So how do you arm yourself with the data needed to answer these and other key questions and finally break out of the backward-looking cycle once and for all? You employ the corporate world’s sophisticated financial tools to convert your accounting data and trends into management insight. You will then be able to concisely identify the direction your firm is heading, its strengths and shortcomings, risks, and opportunities so that you can consciously and purposefully act to increase profitability.
...you must have a pragmatic, yet holistic, overview of firm operations, and be thoroughly informed at all times of all performance indicators
To truly run your firm as a profit-maximizing business you must have a pragmatic, yet holistic, overview of firm operations, and be thoroughly informed at all times of all performance indicators so that you can take prompt, decisive action to stay on course to meet your financial objectives.
Your disciplined monthly or quarterly review should include at least the following reports
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Year-to-date P&L results and projections
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Profitability by attorney, practice area, industry, client, and office
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Expense analysis
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Profitability of matters
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Hours worked at billable rate vs. hours billed at realized rate
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Benchmarking
It is only with these tools that a firm can properly allocate resources and investments to increase revenue, decrease costs, and maximize profit.
Of course, change is hard. And sometimes a true picture of a firm’s finances can spark delicate and potentially explosive intra-firm politics. It is prudent to have a third-party consultant approach the analysis with a truly objective outlook. The resulting analysis should provide you with a measured assessment of the firm’s present state, a detailed plan of how to reach its financial objectives, and a clear path to maximize profits.
Rather than read the ticker tape to learn what has already transpired within your firm, put the basic financial measures of your business to work. Proactively pursue a command of financial intelligence to lead your business to achieve true success.
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[Ariela Tannenbaum has more than 25 years of top-tier leadership experience with global Fortune 500 companies. She helps law firms improve their financial performance with a comprehensive financial analysis that includes strategic budgeting, expense management, proper resource allocation, fee optimization, benchmarking, and identification of strength and weakness.]
