Break Even Analysis for Law Firms

Hi there, Linda Artisani from the Accountants Law Lab. This week we're gonna talk about a KPI that I think is really beneficial as you do this bookkeeping or accounting work for law firms. It's also a number that every person who has a business, any entrepreneur should know, and that's a break-even cost. So we typically will run a break-even analysis for the law firms that we work for. And it's a good action to, when you have the time to talk to the attorney, ask them if they know their break-even number. Every business owner should know this. They should know exactly what it costs to run their firm. So what is the income needed to be generated to cover all the expenses? And remember, with law firms, the biggest expense they have is typically wages. That's the, that's the number one expense. And then you've got insurance and rent and things like that. That's your overhead. But also, if you're a personal injury firm, you might be looking at how much capital do I have on hand? Because they do a lot of advanced client costs. And remember, advanced client costs are those fees that are upfronted on behalf of the client to pay for physical therapy, investigator services. There's a lot of different fees that are involved with personal injury, and a lot of times the client will come in, sign off that they're going to let the law firm take the case and it doesn't cost them anything until they win the matter. And then once they win it, the winnings come in, award comes in, and then it gets divvied out to the attorney and the expenses that the law firm has fronted. Remember, advanced client costs are those mini loans to the client. So it's critical to understand all aspects of the business to be able to come up with this analysis. And you need to really know what's going on in the law firm. So you have to have good clean data. That's another tip that as you start to do these advisory services that we keep hearing, everybody tells us we should be doing advisory. If you start to think about the way some of the things that I'm looking at with the artificial intelligence that are being, being developed now, you're going to be in the forefront of leading the industry as you start to add these services for your clients. So how do we start? Well, one of the things about knowing what it costs to run the firm is you want to start to project your revenue. So that's a big piece of this. And so you're going to analyze, as you start to do some analysis and some KPIs on this, that you really have to evaluate where's the money coming in. So you're gonna, might be looking at with where's the marketing, where's it coming in? That's the expense side. But where's the money coming in? For example, uh, attorneys working in immigration, they're gonna be having people coming in the door. How are they getting out the word out there that they're available to help them become US citizens? So you need to know the ins and outs of that aspect of their business, depending on what type or practice area that your attorney works in. And you want to know, you know, different practice areas are going to make a difference when it comes to this. And you want to know within a law firm how they plan to bring clients in and how many clients they can bring in just to break even. So there would be no taxable event other than whatever they paid themselves in distributions or payroll if they're an S corp. You want to know how much revenue is being brought in to cover the expenses. So that's the start. You want to start at the top. You want to look at any fixed costs that are inside the firm. So you want to really take a look at what, what is being expensed. And you're looking at 3, the 3 main fixed costs at a law firm. So you want to look at the money that's spent for rent, for payroll, for utilities. Those are those big fixed costs you can't get around besides any variable costs, which would be like your payroll and your staff. paying your staff. There's some costs that might be variable when it comes to that, and you want to at least have an idea of the variable costs in the law firm so you're able to track those expenses as well. And these costs can also be with the variable side. If they're a personal injury attorney or an attorney that fronts money to pay for expenses on the client's behalf, like a filing fee, you need to know what those are, and you need to make sure that the firm has that capital upfront money that they're spending that they get reimbursed later with the retainers and the money gets applied. Some of the variable costs that I can think of offhand are software is definitely a variable cost. You just don't know, especially in our firm, we have a lot of software costs and we're always looking to be innovative and getting in the top line. So attorneys the same way, they have, sometimes they have travel expenses that might be reimbursed, but they might have to front that out if they have to travel for their case or matter. You might see that they have to spend money to get research done. Or they might see that they have to do some other pieces or aspects of the firm's work that will require some money spent for that. Anything associated with borrowing— for borrowing money on behalf of having that money to be able to be fluid and keep the firm going for advanced client cost is also a cost for you too. I hope that helps with your Understanding the breakdown. We've got a very detailed article below if you want to read exactly what I'm talking about, how to do this math to figure out where that break-even is. The break-even is your revenue minus those expenses, and that's where you want to come to zero. So knowing the expense side, knowing the variable side, which is the hard part of this equation, and then getting that number. So you know exactly what the number is of revenue that the attorney needs to bring in on a monthly, daily, weekly basis to be able to cover their bills. And of course, in the real world, we want to see more spend. We want more— we want to bring in more revenue than we have for costs so that way we see a profit on the books. That's where we really want to land. So I hope this is helpful. And again, if you want to know more detail, you can read the article below. And until next week, bye now.