When it comes to your law firm KPI dashboard, it can be a challenge to know which metrics are most important. Key performance indicators vary widely across industry and discipline, but no matter your firm’s specialty or structure, there are a few law firm KPIs every firm should be aware of. These baseline law KPIs are numbers that can tell you about your firm’s financial performance, give you insights into how your legal practice can improve in the upcoming financial quarter or fiscal year, and enable you to achieve more rapid growth for your firm.
The Most Important KPI for Law Firms is Labor Percentage
For most law firms, labor is the biggest expense to account for each month. That’s why it is perhaps the most important key performance indicator for law firms to be aware of as they conduct their financial analysis. Rather than using basic labor percentage, we recommend calculating labor as a percent of income after case expenses instead. This number is even more useful for law firms because it focuses on the percentage of your net profit going to labor.
How to Calculate Labor Percentage After Case Expenses
Subtract your case expenses from your gross income. Then, calculate what percentage of that number was devoted to labor costs. Most law firms spend between 20-35% of gross sales on labor. If you keep your ratio at this number based on your percentage after case expenses, you will be on track to be even more profitable than the average firm!
WIP (Work In Progress) as an Asset to Your Firm
One of the biggest challenges for any law firm is being able to clearly assess how much work has been performed this month that will be billed in the next month. Not only is WIP a metric that shows the value of your time and what you expect to bill, it is also considered an asset and can be used to establish loans or insurance.
Law firms can capitalize on this metric by using practice management software like LeanLaw, CosmoLex, and Clio that help to generate automatic WIP reports for your law firm.
Why accounts Receivable Aging is a Critical Metric for Law Firms
According to QuickBooks, an invoice overdue by more than 60 days may be worth only 60% of its initial value. After 90 days, the value might even drop as low as 20%. One of the reasons that accounts receivable aging is so important for law firms is that the longer a bill goes unpaid, the more likely it is that it may never be paid. Sending bad debt to the collection agency is expensive for firm owners, so it’s important to avoid A/R issues from the start.
One way you can avoid issues is by closely monitoring your open accounts receivable report to identify areas for improvement in your billing process. If open AR is a significant issue for your firm, it may be time to implement some changes in order to ensure you get paid on time and can manage paying your own bills more effectively.
The Most Underrated KPI for Law Firms is Income Collected Each Month
Because law firm billing cycles can be vastly different from other businesses, it’s important to keep a close eye on the income collected each month. This number will help you track the financial health of your firm by showing you whether your cash flow is improving month after month. This is important as you consider scaling your firm, bringing on new partners, or investing in new technology or marketing tactics. If this number is not growing, it could signify that your firm should re-evaluate its growth strategy. Although, some types of lawyers, like contingency attorneys, who close only a few cases each year will need to evaluate this KPI on a yearly basis, which further illustrates the need for solid historical financial data.
