|Numbers don’t lie. But they can tell you the wrong story if you don’t read them correctly.A law firm has 5 key financial numbers that it needs to measure at least weekly:|
|Productivity %||the percentage of total hours charged by fee earners to WIP|
|Write-on/off %||the percentage of WIP billed either over or under the amount charged to WIP|
|Average rate||the average amount of revenue earned per hour|
|WIP days||the number of days of revenue that has been charged to WIP but unbilled|
|Debtors days||the number of days of revenue that have been billed but hasn’t been paid by clients|
There are many more key financial numbers that should be measured to provide a complete financial story for the performance of a law firm. Here I’m only focusing on the five key measures that drive improvement in revenue and cash flow on a daily basis. To improve the financial performance of a law firm, you must first get these right; then the other key numbers will take care of themselves.
These numbers are called key performance indicators (KPI’s). KPI’s are more than just information. These KPI’s measure the key revenue and cash flow activities of a law firm.
Albert Einstein defined insanity as doing the same thing over and over and expecting a different result. So it makes sense that unless you do something different with the activities that drive these KPI’s, you won’t get a different result.
Some key activities that will drive improvement in these KPI’s are:
- Set clear daily and weekly hours based targets for each team member
- Have each team member report on their hours charged (self monitoring)
- Focus on marketing and sales activities to drive work for team members
- Closely monitor work flow to ensure each team member is working to their capacity
- Engage all clients by providing an estimate of the work you will do for them and have clients sign off on this before you start work
- Plain English covering letter stating terms of engagement attached to costs agreement
- Re-engage clients during the matter when WIP is likely to materially exceed the estimate
- Bill the amount in WIP
- Ensure the right person is doing the right work at the right rate
- Value the solution you provide to your client and bill them accordingly
- Increase your charge rates
- Set a minimum average rate per hour for the entire practice and bill to achieve this rate
- Provide high end high value solutions to clients with your products/service offerings
- Implement a marketing strategy that creates awareness around the value to the client of the products/service offering to then
- Always remind the client of the value of the solution you provide to them
- Constantly cross sell & upsell
- Define your core product/service offerings and set minimum prices for them firm-wide
- Engage all clients by ALWAYS providing an estimate of the work you will do for them and have clients sign off on this before you start work
- Plain English covering letter stating terms of engagement attached to costs agreement which includes the timing of your billing
- Bill clients at least one-third to one-half of the estimate when the costs agreement is signed and work commenced
- Given that billing is aligned to the agreed timing and estimate per the engagement process, billing is to become an administration function, not required to be done by the fee earners until the final fee is prepared
- Take debtor follow up away from fee earners
- Debtors collection to be the responsibility of a debtors champion (non-fee earner)
- Define the debtor collection process
- Deposit cash directly to trust account and review WIP every week (as a minimum) to withdraw cash to the general account
The 5 key financial drivers for a law firm can not be assessed individually as they all impact on each other.
You need to focus on and understand the relationships between them, and the impact that a key activity that drives one KPI might have on another KPI, both favourably and/or unfavourably.
I spend most of my days working with law firms and other professional service firms on driving improvements in profit and cash flow. Fundamentally every business is the same, they just sell different things. Start by focusing on understanding the 5 key financial drivers and measure them at least weekly to understand them.
Next step is to develop strategies to improve them that have a positive impact on profit and cash flow.
For every law firm I offer a free Profit & Cash Flow Improvement Potential Review using your numbers. We will meet and discuss the financial position of your business, and discuss strategies that you can implement to drive improvement. I will also provide you with a report for you to refer to. Just click on email@example.com to doing something different to achieve improved profit and cash flow in your law firm.
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