Having a tight growth strategy in place in a fast-paced business climate is imperative for any business wanting to remain ahead of the game in their industry. This is no different for law firms. A winning reputation can carry your business to a certain extent, but staying abreast key financial metrics can give you valuable insights into your firm’s financial performance, profitability, and overall financial health. Which is what you need to remain competitive. It is also by studying these numbers that your firm can take action to improve its business and marketing strategy.
We take a look at some of the essential numbers that law firms should track to ensure sustainable growth.
Key financial metrics to track the financial success of law firms
- Revenue per lawyer: Knowing the average your firm makes per lawyer is imperative to managing overheads within your legal practice. Not only does it showcase the holistic figures within your business, it also communicates stats about your firm’s efficiency. If your firm employs many lawyers who withdraw salaries and benefits, but the average revenue per lawyer doesn’t justify employing that many attorney’s at your firm, then it may be beneficial to reconsider your business strategy. Revenue per lawyer is calculated by dividing the firm’s total revenue by the number of lawyers in the firm.
- Lawyers’ efficiency in the form of billable hours: A lawyer’s utilization rate measures the efficiency of lawyers’ billable hours. It compares the actual billable hours worked to the total available hours in a given period. In lay terms, this would translate to how much your firm’s lawyers are actually working. A high utilization rate indicates optimal use of lawyer resources, while a low rate may indicate underutilization or inefficient time management. This is imperative to ensure that the attorneys working for your firm are productive in generating revenue.
- Revenue-realization of lawyers: Another important metric for law firms to track is the percentage of billable hours of lawyers that are actually collected as revenue. This will allow you to be strategic in sending the most productive lawyers to secure bigger business opportunities that can drive revenue at large.
- Customer acquisition cost (CAC): Sometimes securing new business costs you money. To establish the cost of new business within your law firm you would need to establish the cost of all marketing and business development expenses and divide it by the number of new clients acquired in a specific period. Monitoring CAC helps to establish whether your marketing efforts as a firm are effective and in turn allow you to develop cost-saving opportunities, and return on investment strategies when it comes to maximizing revenue in relation to client acquisition efforts.
- Firm profits: The profit margin of your firm measures profitability by determining the percentage of revenue that translates into profit after deducting all expenses. Monitoring business profits is key to understanding your firm’s ability to control costs and generate sustainable profits, and maintain stable growth.
Measure these metrics reliably
If your firm is still relying on manual data tracking methods then you should know you are running major risks when it comes to data reliability and worse, possible red flags when it comes to making accurate submissions to the IRS.
Reliable accounting software platforms can facilitate the accurate measurement and analysis of the key financial metrics in your law firm. Not only will this give you valuable insights into the internal route followed for the optimum growth of your law firm, but it will also ensure regulatory compliance when making submissions to the IRS. Accounting software for law firms such as NetSuite or QuickBooks offers features and functions that give valuable insights into financial performance, operational efficiency, and client relationships.
Leveraging the unique reporting abilities of NetSuite will allow your law firm to track trends, improve financial planning and make data-driven decisions to optimize resource allocation.
If your business would like to implement accounting tools to track key financial metrics, our experts can help. Schedule a discovery call with us to learn about the different software integrations that could aid your business to save money and operate more efficiently.
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