How to Run a Law Firm, the 101 Version - Finance

If you’ve been following along, this is the third part of our blog series where I’m trying to help you answer the question that I asked myself for years in building a firm: What are all of the areas of the business that I should be touching regularly(daily/weekly/monthly) to give myself the best chance of building a successful firm?   

What does that mean?  Well, it all starts with the fact that a law firm is a business, and just like any other business, to be successful, you have to build-out Operations, Finance, PracticeManagement, Marketing, IT, Recruiting and Benefits.  Once you do that, you have to tie them all together into a set of marching orders for you and your team – aka, a strategic plan.  

Today, we are going to tackle Finance. If you find this blog TLDR (I get it), no offence taken here.  The upshot: Finance is the ultimate scorecard of your operations, and to use it well, you need to set and track your key performance indicators (“KPIs”) and manage your business to your financial reporting. To do that, you have to review it monthly in a manner that is meaningful to you.  

Finance is how you ensure that your firm is healthy, successful and allows for growth. If you’re like me, while the firm is small, you might be managing your firm from your bank account, and financial statements are only created in time for tax preparation.  I found myself in that exact same situation in 2016, and it was disorienting.  Throughout 2017 and 2018, I was empowered by understanding KPIs, setting them for the firm, and curating financial reporting for my firm that allowed me to move into managing the firm through my financial reporting.  How did that process start for me?  Stock Legal went through a strategic planning process.  It allowed me to set goals and then work backwards into my KPIs necessary to meet my goals.

Let’s start by defining some terms:

·      KeyPerformance Indicators – KPIs are measurable values that help organizations track progress toward specific goals. They are used to evaluate how effectively an individual, team, or organization is achieving key business objectives. 

·      Profit and Loss Statement – A Profit and Loss (“P&L”) statement, also known as an income statement, shows a company's revenues, costs, and expenses over a specific period. It helps assess whether the company is making a profit or incurring a loss. The statement subtracts expenses from revenues to determine the net income or loss, providing a clear picture of financial performance.

·      BalanceSheet - A balance sheet is a financial statement that shows a company’s assets, liabilities, and equity at a specific point in time.It follows the equation: Assets= Liabilities + Equity, showing what the company owns, owes, and the value left for shareholders. It helps assess the company’s financial health and stability.

KPIs look different for each firm, but can include metrics like: hours billed, A/R as a percentage of revenue, profit margin, changes in expenses, expenses as a percentage of revenue, changes in profitability, bonus eligibility, etc. When you dig in deeper, you can look for leading indicators that can help you track for strategic monthly/annual goals.  By way of example, if business development is needed, you can track number of coffees or lunches/month, conferences attended, social media posts/week, google/facebook ad performance, blog posts, newsletters, website views (by practice are page, etc).  If maintaining your existing client base is important to you, you can track number of “touches” each client has/month (ideally utilizing a CRM/workflow automations), client satisfaction scores, invoice discounts, unpaid invoices, etc.

Your P&L and Balance Sheet are the key components of your financial reporting.  

How do you start tracking KPIs and managing to your financial reporting?  Let me build out the steps for you:

·       We always recommend starting with a StrategicPlan (for goal setting used in creating KPIs).

·       Use an online bookkeeping system like QuickBooks Online.    

·       Hire a company that does bookkeeping (like Legal Back Office) to reconcile your bookkeeping monthly and send your reports.

·       That OfficeManager/Director of Operations should be the point person for your bookkeeper.

·       We’re lawyers, which means most of us deal in words, not numbers.  Have your bookkeeper create charts/graphs demonstrating by week/month the changes in your KPIs for ease of review/reference/understanding.

·       Set a monthly review of those reports/charts/graphs with your leadership team and your bookkeeper.

Taking these actions will be life changing for you, as the managing partner, and for your team.  It builds confidence in firm leadership, demonstrates your business acumen, and allows you to make informed decisions about hiring, firing, benefits, expansion, investment, new client acquisition, etc.  The list goes on and on.

Thanks for reading along on this journey with me. As we publish these blogs, I would love your feedback, thoughts and questions!  You can reach me at sstock@legalbackoffice.com or set up a time to meet with me by clicking: https://www.legalbackoffice.com/contact.  I look forward to hearing from you!  

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