Attorneys often state they “practice law,” but they don’t as frequently speak about managing a law firm as a business. However, a law firm is a business—requiring oversight of personnel, operations and finances.
How can you manage a firm effectively?
Below we’ve outlined some tactics we’ve seen some firms employ over the years that have contributed to their success as practitioners, as well as business leaders.
- Monitor Your Return on Investment (ROI)
All law firms make investments, whether it’s with respect to marketing, time, resources, personnel, case expenses or otherwise.
In order to know what’s most cost effective, you should keep track of each of your investments by recording all costs associated therewith and measuring how much your firm ultimately realized.
For example, with your new cases you can monitor your ROI by logging all of the individual case costs, including those connected to a particular marketing campaign, correspondence and litigation expenses, and then compare those costs to those fees you received for that particular individual.
The receipt of contingent fees also allows you to better understand the value of your overall marketing plan. Are you receiving quality leads? Where are the leads coming from? When you understand your ROI, you will have the knowledge to determine whether you need to streamline the process by working with a lead generation company versus keeping marketing in-house. TV/Radio, internet advertising and search engine optimization are all channels that may enhance your firm, but may not be worth the cost—something only you can measure.
Plan to track your ROI on a monthly or quarterly basis, not just annually. Acknowledging trends can help you adjust your budget to maximize returns. Waiting for annual results can cause you overspend on initiatives that aren’t effective and miss the opportunity to shift your spending toward channels that produce quality results.
As you oversee this process, you must consider management by office, attorney, business segment (case type) and by client. Where are the best results and why? Be aware of labor and overhead costs, in addition to direct/hard costs, and how they play into your overall cost. Managing personnel can difficult, but by tracking results you can remove some level of subjectivity.
- Utilize Appropriate Financial Leverage
A major issue for many contingent fee firms is having sufficient working capital to finance the practice.
Maybe you have an existing bank loan, are utilizing specialty funding, or you’re leveraging personal assets to run day-to-day operations.
Using firm or personal assets can be costly in lost opportunities to the firm and loss of growing personal net worth. Using after tax dollars to reinvest in the firm may cost more you than traditional debt sources in the long run. In terms of repayment, make sure you consider how long the debt may be outstanding. Is this a short-term solution or long-term business plan? Be sure to always evaluate your options with a trusted financial advisor. A line of credit can be a great resource to firms because it enables you to better manage the peaks and valleys incident to contingent fee practice, and you’ll only be charged interest on the amount you actually borrow.
- Profit Maximization
Find ways to maximize not only your fee income, but also the amount of case reimbursements that you’re legally and ethically permitted to receive. Further, think about how your firm can minimize taxable income.
An experienced CPA, who understands the practice of law, is essential. They need solid business acumen and an understanding of all tax benefits available to a contingent fee practice. For instance, depending on your jurisdiction, you may be able to pass through the reasonable costs of your firm’s business financing to your clients, as long as those costs are directly attributable to that client’s case. This, along with all other case expenses that are traditionally charged to a client should be well managed, detailed, and disclosed to your client. By making sure your firm takes into consideration all expenses through the use of a CPA or otherwise, you’ll better manage your revenues and be able to maximize your profits.
Above are only a few ways to more effectively manage your firm as a business. Hiring the right support staff or partnering with a CPA can also provide you with better insight on how to get the most out of your practice. Additionally, certain specialty finance companies, like Counsel Financial, and other industry vendors, are happy to help you navigate your firm as a business and can provide supplement reviews of your business model.
Treating your law firm like a business is essential to your success—if you haven’t already, you can start now.