For law firms operating under the typical fiscal calendar, March 31st marked the end of the first financial quarter of 2022. That means it’s time for firms to evaluate their quarterly financial data in order to draw conclusions about how to best improve their firm in the remaining financial quarters this year. If you work with a firm that does bookkeeping for attorneys, then you may receive a quarterly report detailing important law firm KPIs. If not, you may want to consider exploring alternative bookkeeping services for law firms – like those offered here at Legal Ease – in order to get your hands on this type of data before your next quarterly financial review.
Regardless of whether you receive this data in a financial report, there are a few ways to benchmark success in Q1 that law firms should be aware of in order to increase their success in Q2. Today, we’ll be reviewing some of these key performance indicators for lawyers and sharing other ways for you to evaluate your success and achieve more in the 2022 fiscal year.
Evaluating Law Firm Finances
While advanced KPI reporting is helpful during your quarterly review process, most firms can at least glean some information using the three financial reports from Q1. Here are some key things to look for in each of your basic financial statements:
Income Statement
Your law firm’s income statement will tell you whether your firm made a profit or loss during Q1. More importantly, it will show you where spending can be cut. If your margin is thin, take a look at the past three months of expenses. Are you spending a lot on payment processing fees? Is there marketing spend that isn’t yet generating ROI? Are you billing enough to cover your case expenses plus a reasonable hourly rate? These are important questions to consider as you look toward strategizing for Q2.
Balance Sheet
Your balance sheet tells you how much equity you have in your firm. This is the number that is left when you subtract your liabilities from your assets. If this number is in the negative, it means that your firm may benefit from focusing more on debt repayments and building a business savings account. Newer firms may have more debt than more established firms, which is normal. However, it’s still important to consider what steps you can take to reduce your debt in this fiscal year since it will improve your firm’s financial health overall.
Cash Flow Statement
Your cash flow statement is the most important of the financial statements on a logistical level. This will tell you how capable your business is of paying all of its bills and obligations within a given time frame. When looking at your law firm cash flow statement, look for patterns that can help you determine if renegotiating payment deadlines or changing your spending habits would improve cash flow. This is the #1 way to ensure your law firm’s business sustainability.
Key Performance Indicators for Law Firms
If you want to go deeper and evaluate your firm’s performance on a more micro level, you’ll need to look at some key KPIs for attorneys. We recommend taking a look at the following:
- Labor Percentage – the amount of your gross profit going toward labor expenses.
- Labor Percentage After Case Expenses – the amount of your gross profit minus case expenses going to labor expenses.
- Work in Progress (WIP) – the dollar value of unbilled client work.
- Accounts Receivable Aging – how long your invoices stay in AR. Use this to determine if better billing procedures are needed..
- Income Collected Each Month
- Marketing ROI – the amount you made from marketing campaigns.
- Cost of Acquisition – the amount it takes to acquire a new client.
- Average Fee Per Client – the average amount all clients pay to your firm.
- Client Growth Rate – the rate at which your firm is expanding the number of clients.
- Number of Billable Hours – the number of hours you worked that are directly billable to clients.
These metrics will give you a pulse on how your firm is performing overall and give you actionable next steps to improve your practice in Q2 and beyond. Understanding these key performance indicators is the first step towards a more proactive approach needed to rapidly grow your firm.
