Decoding the Financial Matrix and Mastering Law Firm Finance

Okay, so welcome everybody to today's learning objectives webinar. Today we are graced with a very busy person, Terrell Turner, who is a CPA and CEO of a New York Times recognized accounting firm. He's been named 40 Under 40 for Black CPAs, a top 20 globally recognized financial influencer for 2022 and '23, and I met him through the ABA Law Practice Division. And he, he shares of himself quite freely, and we are all going to benefit from that. So, Terrill, if you want to introduce yourself any further, but go ahead and get started.

Okay, awesome. Well, thank you for the introduction. I will say, for those that are just joining, Um, I like to take the questions throughout, um, because there'll be different things we talk about that a question may pop in your mind. I don't want you to feel like you gotta wait till the end to get your question answered because what I find when I do a lot of these presentations, if you have to wait until the end, a lot of times people forget what their question was. So I would say feel free to just put your question in chat, especially if I mention an acronym. That you're not familiar with, just drop it into the chat. We'll keep an eye on that to clarify that. And I'll try not to mention acronyms without explaining what they are before we throw that out there. But we'll go ahead and get started. So, so today, I really wanted to talk through when it comes down to the finance of managing a law firm, one thing that I have heard from a lot of lawyers is that this is not something that was covered in law school. Um, and, um, from my experience of just knowing a ton of other accountants, um, it can get— accountants tend to explain it in a complicated way. There's probably multiple reasons for that. Um, some may be a mix of them not really understanding it themselves, or some may be a little bit ego, and some of it is there are some aspects of accounting that are a little bit complicated. Um, but our job as accountants is really to make it simpler because you have to be able to use that information to make decisions in your business, in your law firm, your life. So my goal today is to help kind of, you know, demystify and simplify some of the things that you may have heard already, uh, which is why I encourage everybody to ask questions. So When we thought about this session, there was still 3 big things, takeaways that we want to have. It is really just talking through what, you know, some of those, these essential financial aspects, you know, for what we find to be, you know, vital for law firms and for law firms to be successful. And then also we'll talk about some common KPIs. Now KPI stands for key performance indicator. Um, so we'll talk about, you know, some of the KPIs and we'll talk about the story that they tell because one of the things that I tell everyone is that, you know, the KPIs that you monitor for your law firm may not be the same as what the law firm down the street needs to monitor because how you're defining success or what's going on in your business may be completely different. And so I think you have to look at your key performance indicators in light of the story that you're telling or that you want to tell in your law firm. And then also we'll talk about, you know, kind of how to use these KPIs in your law firms. And really, because that's where the value comes, um, is not necessarily just to track the KPIs just because someone on, in a webinar said you should, but really to do it to help you make decisions in your firm. And I always tell people is that When we talk through that, what you'll find is that there may be some KPIs that people have told you, oh, you need to monitor this. And when you start to think about, well, what's the— how does that KPI help me make a decision or how does it impact my decision? You may realize that, hey, you know what? That person probably meant well, but that may not be the right KPI I need to monitor because it's not actually helping me make a decision. So I do want to say thank you to the North Carolina Bar Association for inviting me. So, um, I, I've looked at some of the different programs that they have in their list of events, and so they always have great events. So it is an honor. So, um, thank you to the North Carolina Bar Association for having me. Now, to give you a little bit of context about myself. So my background is accounting. And finance. I am not a lawyer. I did not go to law school. Um, my background is I went to graduate, I, I went to graduate school, went to the University of Notre Dame to get a master's in accounting. So I am deeply, I guess you'd say, um, I got a deep technical education on accounting, but after the education, you know, I spent more of my time working for companies where my job was to understand the numbers and help all the non-finance professionals understand what the numbers were telling us and how the numbers would impact our decisions. And so after doing that for 13+ years of working for multiple Fortune 500 companies and a startup, I decided to start my own firm. And when I started my firm, the T.L. Turner Group, um, we did not initially focus on law firms. I started the firm in April of 2020. So at that time, we weren't focused on anybody. We were just saying, whoever will pay us, we'll take them in as a client. Because as many of you know, navigating the pandemic, I mean, the idea was we started a business at probably the not so optimal time. Um, but over time, as we started doing some consulting with law firms, we started realizing that a law firm's business model and the business model of an accounting firm are very similar. There's a lot of similarities there. Some of the same challenges that law firms are trying to navigate are some of the same challenges that myself and other accounting firms are trying to navigate. And so we recognize that We understood the problems that law firms were dealing with. We understand finance and we understand how to make the numbers simple and how to make the numbers relevant to the decision-making process. So that's what we started to do. And we started a couple podcasts, uh, and one of them, the Law Firms and Finance, the podcast that I host, and there were some people in the ABA that saw it and reached out to me about helping the ABA create finance content for law firms. And so, um, that happened about 2 years ago. So this year I'll be the chair of the Law Firm Finance Committee within the ABA. So we'll be creating even more content, um, to, to, to help where we can. And then outside of all the content we create, I also run a firm where we do bookkeeping and CFO work for law firms., and so that gives you a little bit of context on the person who's speaking. Now, the more important part is really focusing on, on why you came. And so when I think about this, as I said before, before we jump into any of the KPIs or the key performance indicators or any of the financial metrics, I always tell people is a better place to start is to really look at how you define success. Because when you think about, you know, what, what numbers or what financial numbers make the most sense to you, we do have to think about it in the lens of, you know, how you're measuring success for your firm. Now, yes, there are some basic things that we do need to keep an eye on, like no matter what type of firm you are, but when you really start to think deeper on you know, the KPIs and the metrics, you really want to look at it through a lens on how you define success. Now, in the past, I would say in the past, you know, 3 years, I have probably on our, on our podcast and just through different events, we've probably interviewed over 150 different law firms on just with the content we've created and just interacting on just kind of the, our, what we call our industry research. And we're still talking to more law firms, kind of understand like how do they define success because we want to make this contextual to them. So when you think about success, here are some of the ideas and the thoughts that come to mind for some of the firms and how they define success for their firm. Like for some firms, they look at it as their goal is to serve underserved communities. So if your goal as a law firm is to serve underserved communities, then having revenue or the size of revenue in your law firm as like the main KPI that you're monitoring may not make the most sense because that may not necessarily align to what you're trying to do. Now, it still will be a relevant number you want to keep in mind,, but it may not be the most important one. And also, some people may define success by the number of cases that they win, which, like I said, if that is the goal that they want to aim for, that is great. And then there are some, you know, there's some other options that people may have of when you start looking at, hey, we define success by the number of staff members that we have. Well, later on, we'll talk a little bit about like, hey, if If your staff count and your employee count is your goal, then there's a metric, you know, that we want to look at called employee ROI or employee return on investment. Like that will become a very important KPI for you to keep in mind because you want to make sure that you're balancing the financial obligations and the opportunities of the firm with your main goal of what you want to pursue as how you define success.. And so we'll talk about through, you know, those different lenses. And, and that's why I say I encourage everyone to, um, to, to, to engage in the chat because what you define as success may be different from what others. And, and I will say is, you know, for, for people that want, um, I'm curious of, you know, how you do define success for your firm. So, um, you guys can put that in the chat on just kind of how you define success, cuz I'm, I'm curious of like, you know, the mix that we have in the audience and it may be in a, your, how you define success may not be one of the 6 that I have on the screen, which is perfectly fine, but I'm curious on how you guys think about that. So yeah, drop that in the chat. All right. So to really understand, I think the, the finance, I do think that a lot of people, I use this example a lot and this is something that connected very well with people because Most lawyers, when they start a law firm, their goal is not to, you know, I guess be the CFO of their law firm. Their goal is not to focus all their attention on the finance side of their firm, which I think is very, you know, very true and it makes a lot of sense. And the way I explain it to lawyers is kind of like when you go to San Francisco and people want to see the Golden Gate Bridge. Most people are not, will probably never say, you know, I want to go see the bridge because I want to go look at all the support beams that are underneath the bridge. Most people really aren't paying attention to that unless you're an architect. But one of the things that I always tell people is if you ever go to a bridge that doesn't have those support beams underneath, do not use that bridge because it will collapse. And the same thing happens with your business is that although you may not have become, started a law firm or got into law because you want to focus on finance, what I will say is any law firm that does not have stable financials under that, that are really underneath supporting the firm, that firm is going to collapse and fall in. I mean, that's not a firm you want to work at. That's not a firm you want to have your name on. So there is some element of finance that, although that may not be your focus, it is some element of finance that we do need to keep in mind because if that's not in place, the whole firm is going to collapse. And so the best place to start really is when we start to think about your, you know, the basic financial statements. And so I'll start off with the income statement and just kind of giving an idea, kind of overview what the income statement is. Now, you may also hear people refer to this as the profit and loss statement, or you may hear them call it the P&L. And really what this entire statement is all about is telling you how much money do you have coming in your business and how much money do you have going out. And then how much is left over for profit at the end? Now, there are different— there are a number of ways to look at this depending on how your business is or how your law firm is organized. Like if you're a partnership or corporation or a sole proprietorship, like that may impact some of the details in it. But the main thing that you're really looking at is When you're looking at your, what they would call your top line, you're looking at your revenue of like, okay, how much money are we making for the service that we are offering to our clients? Now, this one is a very important point to call attention to because in the past probably 2 years, I've seen several law firms negatively impacted by this era. In accounting. It's when it comes down to trust, how trust accounting works. Not all of the cash that comes into your business's bank account is revenue. And I've seen some, you know, I've had to help some, some law firms work through some errors that, you know, prior bookkeepers have done where they didn't really understand how law firms worked. So what they were doing is any money that was coming into the firm's bank account, they were counting all of it as revenue, which eventually makes your tax liability much higher than it should be if some of that money is in trust, because not all that money has been earned. And not to mention, because they were doing that, their trust accounting was completely messed up. So when you think about the income statement, and I know sometimes people look at that and say, well, you know, I just count all the money that came in as revenue. You really want to look at the money that is coming into your operating account that is not related to trust balances, meaning money that, you know, that if you're transferring money from your trust to your operating because you've earned it, then yes, that would be revenue. So you want to look at it that way of just understanding like, okay, what does our revenue look like? Um, whether it's on a monthly, whether it's on a quarterly or an annual basis. And then you have your, all of your expenses. Now, from what I have seen for a lot of law firms is that most of the time when those, I guess you say they're using some type of accounting system. The bookkeeper probably just uses whatever the standard, you know, what you would call a chart of accounts, which is just a list of account names. They use whatever the standard one is there, and that may not always be the best interest for you. So one of the things that I tell people is when you're looking at all the ways that you're spending money, it's best to think about creating categories that actually make sense to you. Like some of the categories you may have is, hey, we want all of the marketing expenses to go into like one group. And then, hey, we want all of the payroll costs to go in another group. We want like all of the office administrative costs to go in one group. And the reason why I recommend grouping it like this is because it becomes easier for you to understand when you look at your income statement of, okay, all right, How much money are we spending on marketing? Or how much money are we spending on our staffing? Or how much money are we spending on office-related expenses? And when you can start to see your income statement like that, it begins to help you understand, like, hey, where is our money going? Or where are the opportunities that we have? And then at the end of your income statement, you're going to have a a, what your net profit is. I mean, and that's whatever's left over for the partners or the owners of the business. Now, when it comes down to your balance sheet, I will say is, you know, for most, for the most part, most law firms are not going to spend a ton of time on the balance sheet. There are a couple of things on the balance sheet that are important, um, like your cash balances or whether it's your credit card balance that you owe or whether it's loans. And very importantly, if trust accounting is relevant for your firm, it will be your trust account balance. Now, there are some other aspects of the balance sheet. For example, like if your firm owns the building that you operate out of, you may have some, you know, property and equipment on your balance sheet. But for the most part, you're really going to focus in on the cash and the debt or the money that you owe to other people. Now, when looking at your, your, your balance sheet, it is important to know that the balance sheet and the income statement are connected. So we've had to help a couple of law firms kind of work through this mess that happened in their financials where when their taxes got filed, they only— the person who filed the taxes only used the income statement. They completely ignored the balance sheet. So now when it's time to file the taxes again this year, there is a mess to clean up. And that, that's something that you want to make sure that even if you're not doing it yourself, I'll say just having a conversation with your bookkeeper, your accountant about, you know, just, hey, how does our balance sheet look? Is that being properly incorporated into whether it's our tax return or just is it being maintained on a monthly basis? Because another factor that, that becomes important is if you ever desire to bring on new partners in your firm or if you ever desire to sell your firm, the balance sheet may become an important part of that negotiation process. When they're trying to determine like, what's your firm worth? Because they may be looking at, hey, what debt does your firm— is your firm carrying, or what assets are your firm carrying? But if that's not properly represented on your tax returns and your financial statements, you could be hurting yourself if you're thinking about selling your firm or if you're thinking about bringing on new partners. Of whatever that upfront contribution they need to make to become a partner. So you do want to keep that in mind. Now, the third one is going to be your cash flow statement. Now, I'm curious, and you can type this in the chat, like, I'm curious how many people actually look at their cash flow statement. Um, and, and also I would say is, and if you do look at your cash flow statement, I'm curious, you can tell me like, How often do you look at your cash flow statement? Because when it comes down to the cash flow statement, this one can be a little confusing because it often is confusing for a lot of accountants that I've, I've seen and met and talked to. But when it comes down to your cash flow statement, what it's trying to do is really what the name implies. It's trying to follow how cash is moving in and out of your business. Now, for the most part, you know, you're probably going to have, you know, you're probably going to have, you know, your cash flow statement will look pretty similar to your income statement. Like I said, unless you're, you know, you're taking out new loans or unless, like I said, you are buying physical property and stuff like that, for the most part, it's going to look similar to your income statement., but it is a good one to look at because a lot of times the way firms are managing their business is they're just managing based on their bank account. And so I was having a conversation with a, a firm recently and, you know, I was asking them how they felt things were going and they said, well, they feel like things were going well because, you know, they still, they had money in the bank account to cover, you know, their, their operating expenses and things were going well. And so, Like, okay, so we dug a little bit more and one of the things that we came across is the reason why they had money in their bank account is because they had recently taken out a really large loan. And so when we took a step back and we said, okay, all right, if we took that loan out of the picture, what does your cash flow actually look like? And what it revealed is that they were spending about $20,000 more than what they were bringing in every single month, which is why they needed to get the loan in the first place. And so it was one of those things that we had to— where the cash flow statement not only tells you how cash is moving in and out of your business, but it tells you where the cash is coming from because it allows you to see, hey, what is my cash flow from just the pure operations of the business? Me providing a legal service, clients paying us, and then me paying the operating expenses of the business. Because it allows you to separate out any loans or, like I said, any debt agreements. Because a lot of firms that are operating just purely looking at their bank account can sometimes have a false sense of security because there's a balance there, but not realizing that, hey, eventually banks are not going to keep giving you money if you're in a negative cash flow position. Like, at some point, the banks are going to want you to pay those loans back. So we need to figure out how do we improve your operating cash to make sure you have more cash coming in from the normal operations of your business than you do expenses that are going out for the normal operations of your business. And so that kind of gives you an idea of the three kind of high level of the financial statements. Now, as I said before, um, when it comes down to the, the KPIs or the, what they call the key performance indicators, that's where we start to go a little bit deeper than just the general financial statements.. And this is where, you know, lately we've been spending a lot more time with clients and helping them understand this part of their business because as the name implies, it is a key performance indicator, which means a KPI or key performance indicator should be giving you some type of indication of what's going on in your business, whether things are going well, whether things are not going well. And so probably an example that we are all the most familiar with is probably a dashboard in a car. This is probably the most common system of KPIs that all of us are fairly familiar with. If you've ever driven a car, then you've seen this KPI before. And what this KPI is telling you is, you know, if it is a, I will say, if it is not like my very first car that I had, your odometer or your speedometer probably still works. So you have an idea on how fast you're going, which, Amy, as all of us probably know, knowing how fast you're going is a very relevant thing. Because if you're going too fast in certain areas, then you do know that you're going to get a ticket or you're going to put someone else in danger or you're going to put yourself in danger. And a similar thing happens in your business is if you're— if whatever is comparable to your speedometer, if that is going too fast, then you could be putting yourself in danger., or you could be putting other people in danger. And then you have other things like, you know, your odometer, which starts to tell you like, hey, how many, you know, how many miles you've driven. And then it also tells you things like, you know, how many miles do you have left to drive. If you're looking at things like your, the EPA ratings or the EP ratings of telling you, hey, how much distance do you have left on your tank of fuel, or if you're driving an electric vehicle, how much you have left on your battery. Now, the best way that I say that you can really understand how to take this value to the next level is when you're driving a car, if you were just looking at your dashboard, you probably would not get to the destinations that you want to get to. What you would also have to do is you would also have to look at KPIs that exist outside of your vehicle as well. And this is when you start to get the most value is when you take an individual KPI and you compare it to other things that give you more intelligence. For example, if you have, let's say, 50 miles left on your tank of gas,, but you're also looking at exterior signs like a sign that says, hey, your destination is 70 miles away. By comparing those two KPIs, you know, the sign says you got 70 miles to go, your car tells you you only have 50 miles left, it gives you some intelligence to know, hey, you know, I should probably stop because I'm not going to make it to my destination.. And the same thing happens when it, when you're looking at your financial metrics, which is what we'll get into is as you start to comp, you know, you, you look at them individually, they're gonna tell you something important, but when you start to compare them to other, other KPIs or other related KPIs, you'll start to get better insights in how to make decisions. And so I always, I use this example because it helps people understand that KPIs may exist internally, and then you may look at other factors that you combine with your KPIs to, to kind of get a good gauge on, hey, what's happening in the business. Now, another very clear relatable example is if you're looking to hire an associate or a paralegal in your firm, a lot of times what people will do is You know, you, you may understand how much you can afford, but you may also wanna look at what's the market rate, like what's the average salary for an associate or paralegal. What that is, is that's you taking an internal KPI of how much can I afford, and you're comparing it to an external KPI of what is the current market rate for a paralegal? What is the current market rate for an associate?, and by looking at those two, you can start to make a better decision. Now, I've seen a lot of law firms not look at, you know, either of those, and when they start interviewing, they just take the offer that the, I guess they, they throw out an offer and they have no idea if that offer is, you know, going to be acceptable to the candidate. Or they have no idea if they can even afford to actually make that payment. And so one of the things that you want to do is look at those kind of KPIs and compare those types of things. So now what I want to do is I want to spend a little bit more time talking about some of the actual common KPIs, and we'll walk through some of these. And what I will say is if you have questions, definitely feel free to ask questions because I think this is an area where people start to have more questions about some of these KPIs. And as we talk through things, and I'm curious for it, for, for, and you guys can put this in the chat of if there are any KPIs that you have heard other people tell you to monitor, I would say put some of the common KPIs that you've been told to monitor in the chat. And while you're doing that, I'll kind of go through some of these. So one of the first ones that I tell a lot of firms to do is looking at your revenue. Now, revenue, as we explained before what that is, is an important KPI because it tells you a couple of things. One, it tells you, you know, how interested are clients in what you have to offer. Because not all, all types of practice areas are the most relevant for the clients that you are trying to reach. And so what I start to tell people is a great thing to look at is to look at your revenue by practice area. Because whenever I'm working with a law firm and they may tell me, hey, we're a family law practice, I'm like, okay. There's a lot of different types of cases within family law. And the next question I'll ask them, okay, all right, now what types of cases actually generate the most revenue for you? And one of the things that they start to tell me is, I was like, well, I really don't know because we've never looked at that. And so I say, okay, if you were looking to, you know, hire more paralegals who had a specific skillset. Which type of paralegal would you be looking for? And I'm like, if we were looking at your revenue by practice area, it might give you an indication that, hey, you need a paralegal that has experience with this type of case or that type of case, because it begins to help you see where your business is going and, and it helps you understand the story of your law firm because being a family law practice is a very I mean, it's a broad category because there's so many things that fall under that. Even when you start to look at things like if you're an immigration attorney, then there are things that, you know, there are subcategories under that. So the more we can get clear about where the money is actually coming from or what types of cases, the better. And so I'll pause a little bit because we got a couple of questions that have come through. So one of the first questions that someone asked is, should we separate net or gross revenue is best? So I would say to the person who asked that question, when you say net, I'm going to make some assumptions because I don't have the context. But if you want to add more context to what is— what you're, I guess, what you're considering as net versus gross. So typically When you're looking at gross, it's going to be whatever money the client paid, whatever your fee was. And what I normally see when it comes down to net is you may back out any court-specific costs, like all the fees for— okay, and then also the fees that you pay for, let's say, a payment processor. So you want to back those out. So what I would say is, I tell a lot of firms is we want to look at it from a gross perspective to understand like, hey, here's what the, what your clients are paying you. And then we want to separate out what the payment processor fees are. And the reason why I say separate those out, because if you just group the two together and you only look at net, you may be missing an opportunity because you might be using a payment processor that has more expensive rates than other competitors. But the thing is, if you never break out the payment processor fees, you'll never actually be able to know like, hey, am I paying too much for processing fees? Or hey, are the processing fees in the right place? Because there are a lot of companies that are coming out with a payment processor option where they're actually competing on the rates, where they may be giving you a better rate if you use their payment processor. But the thing is, if you only look at net revenue, then that's already backing out the processing fees. So you'll, you'll lose the visibility of that. So I always recommend that you want to look at it at a gross level, and then you want to separate your processing fees so you can monitor that over time. And this is something that I've seen from, you know, different firms where they didn't realize that they were using a processor where they were paying about, you know, 5% on every payment where there were other options that were only charging 3%. So if you think about, you know, that 2% difference, I mean, that's just money going out of the door that they would have had no visibility to if they were only looking at their net revenue. And then the other question we had was KPI from prior firm utilization. So this was some of the KPIs that this person's been told that they should monitor. So things like utilization, project revenue, um, labor costs, and then AR that is greater than 90 days, which I think is very important. Um, and we'll talk about a couple of those. So the other thing that I want to talk about is, um, people costs, which may also be called labor costs. Um, and when you get to this area, what we're really looking at is How much is it costing you to pay the people who help the firm run? And so some people look at this as just your internal employees, but I always like to say is, well, for firms that are using contractors, because not every firm is using, you know, I guess you say W-2 employees, some firms are using contractors to to get the legal work done. So I always like to look at that entire category between your internal employees and your contractors, and let's see how much are you paying those, you know, paying that group of people. Now, as you start to look at that number, what you may start to see is trends over time of, hey, if I see that your revenue is dipping down, One of the questions that I may ask in that area is, okay, all right, if your, if your people cost is staying constant, but your revenue is decreasing, I'm asking, all right, what's going on here? Like, is, is this a factor of like, hey, as Mark mentioned, the utilization, is this the fact that, hey, the, the staff doesn't have enough legal work to do? Or is it that they're not working on the legal work? Like, why is your people cost staying flat but your revenue is drastically decreasing? Like last week we were, um, I introduced a new, um, kind of metric reporting for a law firm where we started to compare the billable hours of their staff and I was comparing it to the revenue that was being generated.. And one of the things that we started noticing is, is that, hey, there are certain staff members here that aren't hitting their billable hours. Like they're, they're very far from it. There are a couple that are exceeding their billable hours, but then there are others who aren't even close. And so that after seeing the, the people cost stay flat and revenue go down, it triggered us or it gave us an indicator that, hey, We need to look into this further so we can figure out what's going on here. Because if you go back to that example about the car, a KPI is supposed to give you an indicator. It may not tell you exactly what the problem is, but it'll give you an idea where to look. Now, another one that I, I tell, um, firms to, to, to monitor when you look at owner's compensation and You look at partner benefits and I would say you want to keep an eye on that and very helpful to have a conversation with your tax professional that you're working with and really understanding like, hey, is that in the, is that in the reasonable range for the tax strategy that you're using? So you want to, you do want to keep an eye on that and then also Bringing that up, and the reason why I say you separate is because when you're doing your tax return, um, though the compensation to the owner has to be separated in the tax return from the compensation to the rest of the staff anyway. So it's probably a best practice to go ahead and separate the two. That way you don't end up having to get your tax professional to do an extra reconciliation, which probably increases the cost of getting your taxes prepared at the end of the year. Also, another thing to keep in mind are the operating expenses. Now, we talked a little bit about that earlier where we discussed some of the, some of the ideas about, you know, breaking that down into subsections and breaking that down into subcategories. And some of those subcategories are things like Maybe you want to group all your marketing costs together. Maybe you want to group all your people costs together. You want to group all of your, your operating expenses together. Because when you start grouping it that way, it becomes a lot easier for you to do one of the advanced kind of KPIs we're going to talk about in the next slide. But another one is going to be your cash and your operating account. So I always tell firms is that you want to keep an eye on what's happening with the cash in your operating account, because that's going to give you an indicator on, hey, if you know what your operating expenses look like, let's say if you know your operating expenses are $17,000 a month and you only have $10,000 in your operating account and you're coming close to the end of the month, what we do know is we need to take some action to make sure that we'll be able to cover our our costs for the next, for the next month, whether that is, hey, we need to do some, you know, do some more legal work, or whether that is, hey, there are customers we've already done work for, but they haven't paid their bill. So maybe there are some people you need to follow up with to make sure that you're collecting so you can get that money in your account to cover your costs going into the following month. The last one I would say is the cash in your trust account. I mean, outside of just the, you know, the requirements that all firms have of just making sure that they're keeping, you know, diligent records around trust account and trust balances. The other thing that the trust gives you an idea of is if you have a lot of money that is sitting in trust, that may be an indication that, Hey, there's some legal work that you or your staff can go execute on. And so one of the things we looked at with a lot of firms where when we saw that their revenue numbers were decreasing, but their people cost was staying flat, we looked at their trust balances and we saw that they had a really high trust balance. And so the question we asked is, well, if we're comparing all three of these, the thing that I'm wondering is, Hey, since we have a really high trust balance, can these staff members do some legal work on the cases that have trust balances? Because if they go do legal work, then that means you can earn more money from what's already sitting in trust if you go do the legal work. And surprisingly, there are a lot of firms who don't look at those numbers, and a lot of times they may have staff members, whether it's paralegals or they may have associates or legal assistants who are kind of sitting around waiting for something to do. When I'm like, well, if we look at your trust balance, that may be an indication that, hey, there are some clients whose cases are not moving at all. And if you have staff members who are looking for something to do or need more legal work to do, that may be a good place for you to start looking to kind of, you know, point them in the right direction. Now, the, the next one I want to talk about is the, the advanced KPIs. So when it comes down to advanced KPIs, there are, this is where we start to do a little bit more comparison. Now, one of the things that I mentioned earlier was this employee ROI or return on investment. Now, a general rule of thumb in the legal industry for attorneys is that an attorney generally should produce about 3 times what they cost. So if you take the attorney's salary, multiply it by 3, that's about, you know, kind of baseline how much revenue that person should be generating for the firm. And the idea is, you know, whatever money they generate, if their salary is $100,000, then they should probably generate about $300,000 in legal fees earned for the firm. That way, a third goes to covering their salary, a third goes to covering operating expenses, and then another third covers kind of owner's compensation, taxes, and other business-related expenses. And the reason why I mentioned earlier about breaking out your people costs as part of your operating expenses is because when you have people costs, broken out separately from the rest of your operating expenses, it is very easy for you to look at your income statement and just say, is the people— is the revenue number 3 times bigger than my total people cost number? If it is not, it gives you a very quick indication of like, hey, where might we need to look to get our team to be more efficient? It may be kind of like what Mark pointed out earlier is it may be a utilization thing, meaning when I look at the time that I am paying my staff, are they working on legal cases during that time? And surprisingly, there are a lot of firms who don't look at that. And I was recently having a conversation with the team over at Clio when we were looking at their analytics, this massive research report that they show. And one of the things that they were showing is that a lot of times the utilization rate for firms was averaging somewhere around 2 hours, or I guess, yeah, about 2 hours, which means in an 8-hour day, only 2 of those hours are billable or being billed to a client, which tells me that, man, that's a very low utilization rate. And what it also tells me that they're gonna struggle to get the right employee ROI or return on investment for what they're paying their staff. Another thing to really keep an eye on is your cash collections rate. Now, one of the things that I see a lot of law firms kind of struggle with is that they'll do the legal work and they'll send the invoice to the client,, but if the invoice is not paid, there's no one following up on it. And so a good thing to keep in mind is when you send invoices, like what percentage of those invoices are actually being paid by the client? Because if you're not collecting your money for the invoices that you're sending out, then you're probably going to have a, a, a negative cash position, which means you're either gonna have to take out a loan, the partners are gonna have to put more of their personal money back into the business, or you're gonna run into some serious complications in your business. So one of the things that I tell firms to do is you wanna monitor over time is what does your cash collection rate look like over time? If you see that your cash collection rate is starting to go down, there's a couple of things we wanna look at. One is, Do we have a process for following up on unpaid invoices? And then also we want to look at is, are we accepting the wrong types of clients? Because while we do want to provide great legal services, if the clients that you are taking on are not able to actually pay you for the legal work that you're doing, then it may not necessarily be in the best interest of your firm to just keep taking on a ton of clients like that. Now, a phrase that I tell, uh, law firms that I'm working with all the time is that I extremely believe in, you know, in, in charity or giving back or, um, or however you want to define it. But what we do want to do is we want to put a budget on the charity work we do or the pro bono work that we do because You can't do an endless amount of pro bono work and still keep a healthy firm. So you do want to keep that in balance. And one of the ways to help you kind of understand that is if I look at all of the work that we're doing and then I'll compare it to the cash that we're actually receiving, I can kind of look at my collections rate. And what I tell firms is if your collection rates are really low, you may need to put doing more pro bono work on hold. Until you can get your collections rate up, because if you don't, you're gonna run into cash problems. Now, another advanced metric would be something like the average case values. Now, what this one tells me is when I look at the average cases that you're bringing in, what we're calculating is how much revenue does the average case usually bring in? Because what that starts to help us do is it starts to help you look forward in forecasting to where If I know that I have, let's say, 10 cases that are pending to close within the next month, it does help me start to kind of forecast and predict what my revenue might look like over the next couple of months. Because if I know what the average value is and I know the average time that it takes to complete those cases, it gives me some confidence on being able to predict what revenue will be because This is one area that a lot of law firms struggle with as they're trying to forecast because it becomes important because when you're making a hire or you're deciding to hire an associate, sometimes like you don't know exactly what your revenue is going to look like in the coming months, but you need to have some comfort to know that, hey, we're going to have enough money to be able to pay their salary if I'm hiring them as staff. And so. Understanding your average case value becomes helpful. And especially if your firm is moving to using a flat fee approach, you definitely want to understand the average value of each type of case. Because as you're trying to assign your, your, your staff to different cases, you need to know that, hey, if I am paying this staff member $8,000 a month, How many cases do they need to be able to work on to be able to cover their costs and hit the right employee ROI number? So that's why it becomes important of understanding your average case value. And then your average case time is just really is how long is it taking you to complete a case? And that becomes a helpful one as you're kind of planning out your staffing and your capacity. Of whether or not you even have the capacity to take on more cases in a certain area. And then the last advanced metric I want to talk about is the, the average gross profit. And what this tells me is when I'm looking at a case, if I know the average case value, for example, if I'm doing a, supporting a divorce case and I know a contested divorce is gonna average cost is gonna be about $17,000. Well, when I look at all of the attorney time, the paralegal time, the legal assistant time, I look at all of that time that they put into that case and I multiply their time by their hourly rate or their, what they cost the firm. Then I can back in to say, okay, all right, how much of that $17,000 does the firm get to keep? Because after you pay your staff, How much is left over for profitability for the firm? And that's a very good one to look at because what a lot of law firms start to realize when they start looking at gross profit is they are spending too much time on the wrong types of cases. They are spending a lot of time on cases that don't really make them money, meaning they may get some revenue, but After you pay all the staff that has to work on that case, there really isn't much left over for the firm. So it is good for you to kind of do an assessment because I've talked to many firms where after we go through kind of a gross profit assessment, what they realize is there were certain case types that they were like, you know what, we don't need to take any more of those cases because we're actually losing money every time we do that type of case. But they didn't understand that until we dug in to look at a gross profit analysis by case type. So there was a question that came in that I want to jump to. Have you seen a firm incentivize clients to pay by adding terms in the invoice? And so, okay, so this question is, you know, have I seen firms use different strategies to try to get clients to pay their invoices faster. I will say I have seen some, um, I have seen some firms do some type of incentive. Um, it usually isn't the most common thing in the legal industry. And I was like, the, I guess you say the fortunate thing about the legal industry is most people do not believe that they can do what a lawyer can do. So people tend to have a high sense of value about what a lawyer does. So people are, I've seen some people, you know, more willing to pay their lawyer than they are to pay for other types of services. And so one of the things that I would kind of, um, at tell a firm to look at before going the route of offering an incentive to getting clients to paying earlier is, is can we look at increasing the upfront retainer fee first? Before we lower the value of your, your invoice or your bill. And if we look at increasing the retainer fee first, if that can solve the problem, then you don't have to offer a discount. Because even if you offer an incentive or a discount, then you're still going to have to do the same amount of legal work. And so I would say try to not discount your services before we've looked at other options. And then also there are things that you can do like adding late fees for bills that aren't paid on time to where what I would just say is you do want to kind of lay out what that plan is or what that policy is with the client upfront. That way the client knows, hey, if your bills are later than 15 days or later than 30 days, here are the fees that we charge. And you do want to make sure that you have someone on your team or yourself that is actually monitoring those things because, you know, a lot of firms talk about, you know, charging late fees. Um, yeah, a lot of firms talk about charging late fees, but since they don't monitor it, the fees don't ever get charged. So if you are going to charge late fees, you do want to make sure that you have a way of tracking it. And so the last thing I want to leave you with is, are some practical tips for financial KPIs. Now, I know we've talked through several different KPIs, um, or key performance indicators. So my biggest recommendations for people is to start simple, is that don't try to go out today and then just say, hey, we're going to implement all of these at once. Maybe take one KPI at a time. And to say, hey, for the next 3 weeks or for the next month or the next 2 months, we're going to really monitor this KPI. And then, you know what, the following month we're going to add another KPI that we will monitor. Because one of the things that I've seen a lot of firms get overwhelmed with is they try to implement 10 KPIs all at once and they end up not, not monitoring any of them at all. And so I always say is start simple, maybe pick one KPI that you want to monitor. And sometimes when you're, when you do pick a KPI, there's a little work that needs to be done. For example, if you're going to monitor your revenue by practice area, maybe that has to change how you're actually putting data into your law firm management system. Maybe you have to change how you're categorizing things in order for you to see that. Or if you want to see revenue by attorney or revenue by staff member, you may have to tweak some things in your system. And so I always say is start simple of pick one KPI and then gradually add some of the others until you get the right mix. Because the whole point of the KPI is to give you an indication of something that will help you make better decisions. If you have a ton of KPIs that you're not looking at, then it's not going to be useful. And then the second one I would say is, is really engage with your bookkeeper. Is because a lot of these KPIs can actually be monitored by your bookkeeper. And what we tend to do, like when we're working with different law firms, is we tend to create reporting that we may update on a monthly, a weekly basis where there's a file that has their KPIs listed to where they can easily see their KPIs. So where before they might have been, you know, struggling trying to find 3 hours a month to spend on it, to where now, because we made the KPIs simpler for them and we made it more obvious, they may spend 30 minutes to an hour looking at the KPIs, thinking about what it means, and then they can go take action that's necessary to improve the results. And so I would say definitely, if you're working with a bookkeeper, engage your bookkeeper. And if you're, you're trying to use some advanced KPIs, maybe you need to look at a CFO or fractional CFO. And I will say this as a person who does provide CFO services to law firms, a lot of times your answers can get, you know, can get addressed by doing a CFO project. Like, you may not necessarily need to hire them for an ongoing basis. Maybe you hire them for a project for 1 to 2 months to help you create the KPI template, and then you can get your bookkeeper to manage populating the template moving forward. I will tell you, it is a lot cheaper for you to do it that way than to pay a CFO to continue to do what your bookkeeper probably could have done. So maybe look at getting a CFO to help on a project basis to set up the template and then have your bookkeeper or have someone internal in your firm that can manage updating the template with the right data. And then also I would say is setting a monthly schedule. This one cannot be overstated. Really just, you know, setting a time on your calendar where you know that, hey, this 1 hour or this, you know, 30 minutes on this day or 30 minutes on that day, like this is the time that is dedicated to looking at my KPIs and figuring out, hey, what's going on in the business, asking myself different questions so I can understand how are we making better decisions or how are we going to make better decisions in our firm. And as always, I would say test your assumptions. Um, this is a, a very important one because a lot of firms tend to think that they're making a lot of their money from different types of cases. But then when we actually look at the data, what we realize is you're not really making that much money from that type of case. Actually, this other case type over here, that you don't really think about or talk about that much, that's where you're really making a lot of your money. But unless we look at the data, you really won't know that. And then as always, I would say is, you know, don't let things get complicated. I mean, you already, you know, practicing law is complicated enough. So I would say is don't let the finance side get complicated and really leverage, like I said, If you're working with a bookkeeper or a CFO, leverage them to help simplify things so that you can really focus on what matters for the work you do for your clients and the things that you do in your firm. And so I would say, I mean, if there are any, any questions that you guys have about the KPIs or just, you know, kind of context advice, um, I think what we'll do is we'll, we'll we'll pause the recording. So you don't have to feel like your answers are being recorded or your questions are being recorded. So I would say if you have any questions, feel free to put it in the chat, or if you wanna come off of mute, you can ask the question as well.

Thanks so much, Terrill. I am gonna stop the recording and so people can feel free to ask questions, 'cause I have one for you, but Again, thank you for your time today, and, uh, I will get this recording out to everybody hopefully this afternoon.