Revenue Minus Expenses = Law Firm Profit
That’s a simple equation, but making sure the result is positive can be a challenge. There are two components to the law firm profit calculation, so the only way to increase profit is to either raise revenue or reduce costs. Here are a few best practices to help you rigorously manage both.
Expand Your Client Base – You can enlist new clients through an expanded marketing plan and by actively seeking referrals from existing customers. Before taking on new clients, however, you should use data from your accounting system to determine which types of clients or cases are most profitable. Once you more narrowly define your target client, find ways to attract them to your firm.
Expand Your Marketing Program – This will come at a cost, but if you hope to attract new clients, you need to publicize your services, expertise and accomplishments. Define an annual marketing plan, and invest in a solid website, local advertising and PR. In fact, you might even want to consider targeted social media ad campaigns, as I discussed in this blog post.Many law firms allocate between 2.5-5.0% of revenue for their marketing budget. If done properly, a well thought-out marketing plan will result in a net increase in revenue and ultimately pay for itself.
Expand Services With Existing Clients – This is actually a highly efficient and cost effective way to increase your revenue base. By gaining new business from current clients, you avoid the cost and risk of new client acquisitions. Also by dealing with current clients, you avoid expensive start up costs that can result from the new client learning curve. Have all the firm’s attorneys make current clients aware of all your services and ask if they require any of them.
Control the Controllable – Some expenses are fixed for long periods of time (office space leases, for example), so they are difficult to reduce in the short term. Therefore, focus on those costs that you can control in the near term. Set up a centralized purchasing program where one person is responsible for the firm’s regular purchases. Look into any collaborative purchasing programs with your local bar association or business organizations that may combine purchasing needs for better overall pricing from vendors.
Don’t Forget Hidden Costs – Leases for copiers, insurance premiums, and utility costs can sometimes be overlooked. Make someone responsible for reviewing these on an annual basis. In the current economy, vendors and suppliers are looking for new revenue and are likely to offer reduced cost deals to get your business. Worst case, you can use this leverage to get pricing concessions from existing suppliers.
Get Efficient – Taking advantage of technology can be a way to become more efficient and cut overhead costs. As I explain in this blog post from a few weeks back, new and emerging technologies, including mobile tools and cloud-based law practice management systems, are making it easier than ever for lawyers to run their law practices. For example, using law practice software for invoicing, managing activity, and sharing information is one way to minimize administrative expenses.
Ensuring your law firm stays “in the black” requires constant attention to both sides of the profit equation. The rewards for doing so, however, are worth the time and effort.