Law firms often miss the true cost of running their practice by focusing only on revenue. A Legal Management Magazine study found firms that track profitability systematically see a 20% revenue uplift. Speaker A explains how bookkeepers can help extract data from Clio and other legal-tech platforms to identify which clients and matters actually make money.
Chapters
This week we're going to discuss understanding internal profitability tracking in law firms. So in today's competitive legal landscape, there's a lot of internal profitability that is no longer nice to have, it's critical to have. And with attorneys, if they're looking to have their firm thrive, it's our job as bookkeepers to help them grapple with the complexities of tracking that profitability. Especially even the smaller attorneys. It's, it's an opportunity that they— to give them data that they never even knew existed or thought they could have. So with that being said, the importance of tracking profitability is— I, I see this a lot with smaller firms. They just put their head down and they do their work. They don't really think about it. Sadly, they use their bank book or their bank balance as their guide if they're making money, and they look right to the bottom of the profit and loss, and they really don't look at— maybe overhead costs or ways of calculating what it costs to run the firm. And I think that's a critical number that everybody should know, whether it's your own accounting firm or the law firm, you need to know that. And it's a good action as a new bookkeeper to this space, or even as an existing, take a look, know what that number is to— it is to run your firm. I'm sure it's the same as the attorneys, their expense, their biggest expense in their overhead is typically their wages. And then you want to dig deeper into those wages and find out which attorney that works for the attorneys is profitable, what practice area is profitable. Same thing for us as an accounting firm, right? We're all service-based firms. It's the same type of thing. We need to kind of dig into that. And I think if you can give your attorney that information, a lot of them know by their gut which attorney in their team is bringing the profits in, who's the rainmaker, for example. Oh, it's so important to know who the worker bees are, who are the ones that do the hard work. Those are the things that you can find out for them or tracked for them in their software. It's typically done in their legal tech software, like their LeanLaw, their Clio. So a lot of times it's difficult, like it's not difficult for us to get the information out, but it's difficult for the attorney to extrapolate it and to understand it and to get a clean picture of it. 'Cause you can get some junky data. And that's the first thing we always tell attorneys that come to us, let's clean the data up and then let's analyze it. And they're usually really excited about the analysis part and not so much about the cleaning up part, but that's important. And firms need to really adopt a more comprehensive approach to profitability tracking, and make— that way they can make informed decisions. And really it's a lot about resource allocation or pricing strategies, or just knowing what practice area, if it's multi-practice area firm, which one's making them more money, which one's bringing in the bigger nut. So I think if you start to take a look at just high-level KPIs, revenue versus overhead. Many firms focus so much on the revenue side. I had an interesting conversation with somebody who was talking about with the revenue, it's all about that number. It gives you a big ego. Oh, I made $1 million in sales. But, you know, if you don't make any money at the end of the day, how good is making $1 million? It's not, you know, how much are you able to pay yourself? So you need to help them understand the associated costs of overhead. And what it really costs them to run their practice. That's going to give them that baseline and know what they can do to, to get over and above that to make the profit. And that would include their office expenses, their technology investments. This is always a deep conversation. You, you run into a lot of attorneys, they don't really want to invest in the technology. And sometimes it's, um, it ends up being something that you have to really explain to them that you're going to fall behind the times and behind your competition if you don't stay up to date with good technology. Um, it's, it's essential truly for a profitability picture. And that's where you get those deep details when you enlist these software. All of these software continue to get better and better every year when you're looking at a Clio or a LeanLaw and some of the other tools as well. And really to evaluate profitability effectively, yes, we can do some of that inside of QuickBooks. I like, we really like LifeFlow at our firm. We're able to do that, but our firm services more mid-market firms. So we have the ability to afford LifeFlow. I wish it was a little less expensive for the average person with a smaller, you know, smaller amount of people working in their firm. It is not— it's very pricey, but there are other options too, like Reach Reporting, or maybe even using QuickBooks and then pushing it out to their spreadsheet sync, which I've never been really successful with using, but it is there. You wanna track the profitability by the case, by the practice area, and these are all things you could do with custom fields, but you're just not gonna get it in enriched data. Don't forget, with custom fields inside of QuickBooks, If they're in a bigger level of QuickBooks, they get 3 custom fields that are actually effective in reports. The other ones are only on detailed reports and it really restricts you with using the product for that. That's where the other software come into play. And then help your client make those strategic decisions. So without a clear visibility of profitability, you know, the law firm is going to risk making bad decisions. Maybe a bad decision about hiring, or it could be a bad decision about marketing. Those are the things you can help them with, help them navigate, especially as you're on a bookkeeping or accounting firm that sees a lot of different law firms. You've got that eagle eye on all these different processes and how some firms do better than others, and you can share that with your clients, not sharing the names, but knowing that you have that data in front of you that lets you look at it and decide what works the best. And it, it will help you to help the firm pivot, pivot, and their strategy and focus on high areas of to drive growth and more profitability. Profitability is really what we're looking for. We're not looking for that big revenue number. We're looking for a higher profitability ratio. So the impact of really effective profitability tracking is that it will result in perhaps about— and this is according to Legal Management Magazine— 20% higher revenues. If you start to track this stuff, you're going to increase your clients' revenues by about on an average of 20%. That's a big number. You wanna identify the higher performing attorneys and teams. A lot of our firms work in groups and teams, and then which team's doing better than the other and why? And then figure out why so that you can start to replicate that across multi-teams that are working for the law firm. And then allocate the resources. Maybe one team has more people than the other, or maybe they have less and they're churning and burning at a more efficient rate. Make data-driven decisions about pricing strategies, making the right decision on what you're gonna charge and how you're gonna do your billing. It's important to have those conversations with your attorney clients. It'll help them to streamline their operations and understand which practice areas are more profitable. And then also, don't forget the most important thing is a happy client is really your best referral. And you can help your client, your attorney-client enhance their client relationships and let them recognize which clients contribute the most to their bottom line, especially if they have repeat clients depending on their practice area. So you wanna look at that as well. Once you start implementing profitability tracking, you want to invest in the technology. You want to have the conversation with the client to set clear KPIs that they want to track. Let them pick 3. Don't go crazy and over the moon and pick 20. And then truly, it's important to have regular training and communication with your attorneys and really with the staff to make sure everybody's on the same page. Sometimes it's hard to get buy-in on new technology with the firm. And then conduct periodic reviews to make sure everything's running well. So in really understanding internal profitability is vital for a long-term success with your client and in your own firm as well. And it will help that client to be increasingly more competitive in their legal environment. Law firms make informed decisions on a daily basis that enhance, and this will help them enhance their financial performance and help them with strategic positioning, long-term goals. If they set goals with you, make sure you hold them to it and keep revisiting those goals. Don't just write them on the whiteboard and forget about it. It's important to keep revisiting them. Maybe hire a firm that will help guide the client through a lot of these things. That's what we've done. We've partnered with Ascend Consulting to do some of this work together as a financial team, and it's really been a wonderful relationship with us. And because they look at us as equal partners, we all both have our strengths, and it's been really wonderful to have this in place. And I think that if you can do that or find that seat CPA or firm that will partner with your firm and really work to equip yourself to navigate through the challenges with attorneys and seize the growth opportunities, you're gonna have a happy client, your client's gonna have happy clients, and everybody's gonna be happy in the long run. So I hope this is helpful, and until next week, bye now. Bye.
