Law Firm Financial Benchmarks for Maximizing Profit
By Adrian Aguilera
Setting law firm financial benchmarks may seem like an unnecessary task. Still, it’s crucial for a profitable business. Key benchmarks uncover areas that either drain or enhance resources, decrease or increase productivity, and (most importantly) lose or gain profit. This piece reveals the background of financial benchmarking, the process of productively setting benchmarks, and financial benchmarking tools your firm can implement today.
What is Financial Benchmarking?
Successful companies set benchmarks for measuring the performance of every process within their business. Law firms are no exception. Setting and efficiently managing key benchmarks will help you spot and correct problems before they significantly affect law firm finance. A monthly review of your company’s benchmarks is a good standard for identifying areas that expand profit and fixing areas that are diminishing revenue.
How Does Financing Differ for Law Firms?
For most service-oriented businesses, work is performed, an invoice or bill is issued, and the client/customer immediately pays. Law firms don’t typically earn payment for completed services right away. Due to the potentially high cost of court cases and legal services, it can take weeks or months of follow-up for clients to pay their invoices fully. Not to mention, non-billable admin work can create a productivity and cash flow drain if not efficiently implemented. Therefore, law firms must set financial benchmarks for every aspect of their business. This, in turn, maximizes the productivity and profit of all resources.
Examples of Key Financial Benchmarks for Law Firms
Your financial benchmarks provide a bird’s-eye view of productivity and law firm financial performance. This includes the effectiveness of your staff’s work output, payment collection processes, and marketing efforts. Below are key benchmarks your firm can use for maximizing work output and cash flow.
1. Revenue benchmarks
Revenue per person on payroll:
Every person on your staff should effectively generate cash flow for your firm. According to a guide from the American Academy of Estate Planning Attorneys, each person on payroll should generate $150K-$175K per year. According to the guide, you can generate this figure by dividing last year’s total amount of gross revenue by the number of people on your staff. If the figure is lower than the benchmark, there may be various overstaffing or inefficiency trouble areas that should be addressed.
Revenue per attorney:
The American Academy of Estate Planning Attorneys explains that every attorney (excluding non-attorney staff) should generate $500K per year as a standard. This benchmark is calculated by dividing the total gross revenue from last year by the number of attorneys on staff. If this figure is considerably lower than the benchmark, you and/or your attorneys may be spending too much time on non-attorney work.
2. Billing and collection benchmarks
Billing turnover rate:
Your firm should bill hours to clients as quickly as possible. Less than 50 days for billing (once work is completed) is a good standard benchmark.
Collection turnover rate:
Receiving payment is generally tricky and may involve follow-ups. Aim for less than 70 days from when the client is billed as a standard benchmark.
3. Marketing benchmarks
Marketing to existing and new clients:
According to the American Academy of Estate Planning Attorneys, law firms should invest 8-10% of gross revenue on marketing. As a result, too little investment may result in a missed opportunity for new case leads and conversions. And, too much investment may indicate a lack of a strategic, targeted marketing plan.
4. Rent and Overhead benchmarks
Post-pandemic increases in remote work may mean you are spending too much money on office space. The American Academy of Estate Planning Attorneys guide shares that 6-7% of your gross revenue should go into renting office space. The guide also states that 250-350 square feet of office space per staff member is ideal. As a result, if you’re past this benchmark, you may want to downsize your space for cost savings.
How to Hit Your Financial Goals
There are several tools you can implement to help plan, implement, and measure your benchmarks—maximizing law firm financial performance. This includes itemizing all expenses, forming a budget (with benchmarks), improving the productivity of mundane tasks, and measuring overall results.
Itemize Your Expenses
Proper financial performance reporting begins with itemizing all expenses, from post-it notes to staff salaries. This provides an initial base for your budget and benchmarks.
Expense itemization can include:
- Office Space
- Staff salaries/wages
- Software services
After listing all items; you’ll want to find out how much you’re spending on each and if it generates value and cash flow. For example, you may discover that you’re using invoicing reminders and payment methods that produce poor collection results. As a result, investing in billing and invoicing and online payments software services may solve this issue.
Set Your Budget and Benchmarks
Once you’ve mapped out the cost of each item, arrange a budget by using the financial benchmarks above or a similarly strategic benchmarking system. These benchmarks will help you determine if you’re over or under-spending on your key expenses and if your firm is managing each expense as effectively as possible. Also, consider implementing software services that offer Quickbooks integration for easily itemizing, budgeting, and planning your firm’s expenses.
Measure Profitability with Reporting Tools
Once your benchmarks are set, use a software service like MyCase Financial Reporting for measuring progress. This MyCase tool provides critical insights such as each employee’s financial contribution to each case. In addition, you can generate reports on all aging invoices for outstanding balances owed and time and expense insight on all billable and non-billable time.
Get Started Today With The Best Legal Financial and Payments Software
Financial benchmarks are the key to maximizing your law firm’s productivity and cash flow. MyCase financial benchmarking software makes planning, implementing, and measuring your goals easy. Try MyCase today risk-free with a 10-day free trial. We offer affordable monthly and yearly subscriptions. Plus, there’s no commitment required, and you can cancel anytime.