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Lisa was terrified. She hadn’t really kept up with her accounting since opening her firm. She knew there was money in the bank but didn’t really understand what to look for in common accounting reports. It turns out what she was really avoiding was learning the truth. Lisa hid behind the lawyer’s favorite “I don’t know about numbers” mantra because she was scared the numbers would tell her she wasn’t a successful businesswoman.

We’re ready to flip the “if I wanted to think about numbers, I wouldn’t have gone to law school” excuse on its head.  As a business owner, you should be excited about the numbers. To run a successful business, your business has to be profitable, which means knowing how you are doing and what to change if you’re not.

It turns out, with our help, Lisa realized she was profitable and doing well with her business. Once she understood her numbers, she realized where she could invest to see bigger returns and how that would impact the value of her business.

The essential steps to healthy profits are having:

  • A Financial Strategy – a plan for the business to succeed financially

  • Profit Growth – an understanding of how to grow the bottom line

  • Enterprise Value – a pulse on your firm’s market value

  • Key Performance Indicators (KPIs) – the ability to make data-based decisions

01. You Need to Understand What Levers to Pull to Make Your Financial Goals a Reality

Your business needs a documented long-term financial strategy and profitability model. This is a living document that forecasts revenue, expenses, net profit, cash reserves, and the value of your business.

Think about this document as the numbers-based counterpart to your firm’s written vision and goals. This isn’t a once and done project, but a tool you use to manage your daily operations actively.

It’s not enough to say in December that you want to make $200,000 more in profits next year and it will magically happen. Having a financial strategy allows you to see exactly what steps you need to take to generate additional revenue (how many additional cases will you work?) and how much it will cost you to generate that revenue (will you need new staff or technology to help you get there?). This is the type of thinking that will allow you to understand the steps you’ll need to take to reach your financial goals.

This exercise doesn’t need to keep you up at night. Our Lab financial coaches live to help lawyers get excited about their financials. We can walk you through a process that will make you feel like a financial genius in no time.

Jeremy Danilson

Lawyerist Lab Member

The financial forecasting tool I built during Lawyerist’s LabCon event is invaluable

I can see how my decisions impact my firm’s financial health over the next five years. To say it is giving me confidence in my decisions is an understatement.”

Swirl

02.Focus on Profits, Not Just Revenue

We hear lots of lawyers bragging about how much they have increased their revenue year over year. Unfortunately, we know businesses that generate several million dollars of revenue a year and still show a loss. Revenue is like the setup for the story; profit is like the plot.

Let’s make sure we’re all on the same page with some defined terms:

Income or Revenue – the amount of money you bring into the firm. For law firms, this is the money you generate from your client work.

Net Income or Profits – the amount of money you have left after paying all of your firm expenses.

Bernadette Harris

Lawyerist Lab Financial Coach

Go Deeper: Podcast Episode # 342

Thinking Through Your Financial Strategy

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Focusing on revenue alone doesn’t tell you how much you are investing to bring in the income into your firm. For example, say your goal is to generate an additional $200,000 in revenue next year. You are already at capacity with your work, so you hire an associate to help you with the caseload. Your associate bills at $200/hour and bills 1,000 hours/year. Congratulations! Hiring your new associate helped you reach your goal of generating $200,000 in additional revenue.

The problem? You had to pay the associate a base salary of $125,000, plus approximately $10,000 in employment taxes, plus $8,000 in benefits, plus $5,000 in additional expenses. Your $200,000 in additional revenue cost your business $148,000, so you only made an additional $52,000 from your hiring decision.

This analysis applies to all the major decisions in your business. You need to understand the complete financial picture to know what’s happening in your business. This is also where you can have fun by expanding how you think about your firm.

Go Deeper: Podcast Episode Podcast Episode # 306

Getting to Know & Love Your Numbers, with Bernadette Harris

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Our Lead Lab Coach, Stephanie, was on the phone with a woman who was at her wit’s end. She desperately needed to make more money, but she also had a special needs child at home who required extra attention and she didn’t have any more hours to give. What could she do?

Remember the discussion under Healthy Clients about new ways to think about pricing and delivering services? This is where things get fun! When we aren’t just focused on billable hours, we can be open to new ways of generating revenue that cost less and are more profitable. We start to see the value of investing in products that could offer passive income because we see the long-term impact it has on our business’s value (more on that in a moment). All of these components start coming together to create a healthier business. Yes, you could simply raise your hourly rate or bill more hours, but that seems incredibly boring. We’re here to accept the challenge and help you make more and work less!

03. You’re Building an Asset that Has Market Value

Your business is an asset with an enterprise value. Enterprise value is thought of as the total value of your business or how much your business is worth. For far too long, lawyers have not thought of their businesses as an appreciable asset they could sell. We think the regulations are changing and non-lawyer buyers will increasingly enter the market. Even so, firms can be bought and sold today and you will benefit as an owner if you shift your mindset to think about your business in this way.

Go Deeper: Podcast Episode #345

Steps to Buying a Firm, with Tom Lenfestey

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Realizing you are creating an appreciable asset will start to fundamentally change how you think about your business. Here’s why. Do you own property (a house or condo)? Have you ever thought about improvements—big or small—and considered how your decision might impact the property’s resale value? Maybe you painted the porch purple anyway because that’s what you wanted, and you knew you could repaint before listing. That’s the mindset you need to have when building your business. Maybe it’s “fine” for you to be the one that drafts initial pleadings, or does this routine task now, but would a future owner see it as valuable? What would a future owner consider changing?

Would a future owner see your system as valuable?

Here’s the fun secret: even if you have no current intention of selling your business, this line of thinking will absolutely help you build a better business. And, you’re more likely to build something that could be sold one day if you change your mind. We’ve worked with attorneys who are facing retirement within a few years who wish they had thought differently of their business sooner. While the best time to plant a tree may have been 20 years ago, the second-best time is today. The same holds true for your business!

04.Learn to Make Decisions with Data, Not Your Gut

Once you have the basics for your financial strategy in place, you’ll start seeing data differently. Now, instead of worrying about whether you can really afford to hire that next team member, you’ll know confidentiality exactly how much it will cost, how much you have in cash reserves, and how the decision can positively impact your business now and in the future. You’ll feel great knowing you’re making data-driven decisions instead of only relying on gut instinct.

Your work preparing your healthy strategy also allows you to have clear short-term and long-term goals. You and responsible team members can actively manage these goals through weekly or monthly key performance indicators (or KPIs). This will allow you to better understand in real-time the overall health of your business and where you need to make adjustments.

Stephanie Everett

Lawyerist Lab Coach

Go Deeper: Podcast Episode # 265

5 Financial Key Performance Indicators for Your Firm

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With a little bit of work, you can put the right systems and plans in place to ensure a clear path to profit and growth. Whoo-hoo! Finances and numbers can and should be fun. We get that the hardest part is often just getting started. Lisa was scared of what she didn’t know.

Many attorneys we work with are unsure how to get started and where to ask for help. You don’t have to feel alone or without help. We work with lawyers in our Lawyerist Lab program to create a strategy, build a model, and map out relevant KPIs. Our financial coach helps lawyers make sense of—and love—their numbers.

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Healthy profits gives you options. Most relevant, healthy profits allow you to be the healthy owner you set out to be when you first launched.