In this video, Linda Artesani of Artesani Accounting explains the breakeven cost KPI for law firms, emphasizing its relevance for firms of any size. She defines breakeven as the point where revenue equals total expenses, and stresses the need for a cost‑accounting system to understand profitability. The discussion distinguishes fixed expenses (rent, salaries, insurance, utilities, accounting services) from variable expenses (client disbursements, filing fees, outside counsel, research, travel, write‑downs, write‑offs). Artesani walks through how to calculate the revenue needed to cover these costs, how to translate that into required billable hours, and how to set profit goals. She compares fixed‑fee and hourly billing models, highlighting the importance of clear client communication, upfront paperwork, and diligent collections. The video also touches on analyzing profitability by matter and practice area to guide strategic decisions for a profitable, growing firm.
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Hi there, Linda Artesani, Artesani Accounting. This week we're going to dive into another KPI and it's the breakeven cost. It might be one you've not heard of, but it's a pretty critical one if you're running a small firm, a large firm, a mid-sized firm, all these different types of practices. If you're new or an established firm, it's a number you really— every business owner actually should know. So I get it, it probably is going to sound a little bit like we're talking about cost accounting for a law firm. Do we do cost accounting? But you actually should. I think it's important to implement a cost accounting system so you can understand your own business. And once you determine how profitable your clients are, it's gonna help you to figure out what the numbers are on the services that you sell. So think of it as your product is just your services that you're selling to your your services or your result that you're selling to your clients. And we just need to determine if it's profitable. And you're going to look at different people inside your practice, whether you're looking at the attorneys or the paralegals. Are they profitable? And these are different people that work in the firm. You might look at, you know, your receptionist is overhead. So when you start to look at this to determine numbers, it's important to determine what parts of these expenses are fixed or variable. That's the important thing to do. So as we start to determine the numbers, you want to start with your revenue. You want to start with looking at what is the revenue at your firm? What do you sell? What are the practice areas? What do you sell? And what is the profitability on what you sell? So when we're trying to determine breakeven, we're trying to look at the revenue, the sales minus the expenses, Nets to zero. That's the number we want to know. And every, every business owner should know this number inside their head because it's important to know exactly what the expenses are. What expenses equal the total expense side of this calculation? Is it fixed expenses? Is it variable expenses? So we'll get a little bit into that in the article, probably in more depth, but here I'm just going to talk briefly about it. So when you're looking at the expense side, especially if you're new, you want to look at these numbers because fixed expenses are simple. You're looking at your rent. You're looking at your salaries. What is the wages? Those are your 2 big ones. What are your insurance? You know, how much do you spend on insurance every year? What is your internet costs, utilities? Those are the things you are looking at that are completely flat out, straight out fixed. Accounting services. What does that cost you? Now, when you're looking at variable costs, you're going to look at things that are cost of doing business. That could be client costs. You might know some are fixed. Maybe you know that there's always a $400 filing fee on every matter that you have. But for costs that are variable, could be anything that's involved in the matter or case, because remember, you're loaning the client money. So that's money out of your pocket that you will recoup, but it's also an expense you have to factor in because that is money out of the law firm's bank account before the matter settles. So it's super important to know that cost and what's involved in those costs. Other variables that we see at law firms can involve outside counsel. If you have to hire an outside counsel, it could also be research fees if you're not quite sure. Maybe you have to travel to do the calculation, you know, do the— settle the matter or case, and the travel fees can be variable. We don't really know what they are. They can go up or down. So that's another expense that's just kind of up in the air. And I go into more detail in the article about all the different ones you're going to see at a law firm, but these are just some of them, the ones that you're going to look at and see. So we have to factor in the fixed costs and the variable, put those numbers together. How much sales do you need to have? How much revenue do you need to bring in? How many sales to cover that number? And that's your breakeven cost. So once you know that figure, now you can start to calculate Where do you want to be in the end of this? Calculate what do you want for your pay to be? What is your— as a business owner, what is your— what are you looking for to make in this whole journey? $100,000, $200,000, $300,000? How much do you want to make? You start to do the calculations of how many billable hours are there. You had to factor in those write-downs. You had to factor in those write-offs. Those are— Those are 2 very big factors Look at those averages. If you're new, you really want to stay on top of your collections. You want to be reasonable with your billing so you don't have— want to be reasonable with your client relationship upfront. Let them know what it's going to cost. It's kind of why we like the fixed fee method, because it's, it's a set number. You are telling a customer that you're going to charge X to produce X service for them. If you're hourly, it's a little harder to do, and that's when some of the line items will get argued with the client. So you really want to have that really good relationship and really good upfront paperwork when you start working with a customer so they have complete visibility on what the expenses are going to be for them. What is the matter going to cost them? And then of course we can get into how profitable is each matter, how profitable is each practice area. These are the things that we look into as the accounting firm for you to determine what is the best avenue for you to go down, what path is best for you for profitable profitability in your law firm. So I hope that explains what the overhead cost or your breakeven cost— actually, breakeven overhead is that you should know the number of your overhead, what is that expense side, and then the breakeven is how much revenue you need to have. So it's basically, that's as simple as that. It's a simple, simple math problem. And it's very easy to calculate and it's easy to track. And determine what is the best route to go to have a profitable firm and stay on top of your expenses and really help your firm grow. So I hope this is helpful. If you have any comments, please feel free to add them below. And on that note, I hope you all have a wonderful, wonderful week. Bye now.
