One of the biggest questions small law firm owners ask us when it comes to optimizing their business is how they can tell if their profit margins are healthy. Sometimes, finding benchmarks for profitability for small firms can be challenging, as many national benchmarks are considering large and mid-sized firms as well. Still, your profit margin is the best indicator of your firm’s financial healthy and overall efficiency and needs to be evaluated in order to help your firm succeed. Today, we’re going to share some advice about how to understand your profit margin in context, manage your law firm’s labor costs in order to boost profits, and give some tips you can use to boost your profitability overall.
What is the ideal profit margin for small firms?
If you go searching for stats on the ideal profit margin, you will often see numbers like 20-30%, but is that number relevant to small firms? According to the American Bar Association, the median profit margin for law firms with 1-10 attorneys is approximately 30% and larger firms tend to have margins that are a little bit higher, mostly due to being able to reduce overhead more efficiently.
What percentage of labor should I aim for in order to achieve a high profit margin?
Labor is usually the most significant overhead expense for law firms, so it’s important to ensure you keep it within a good range to achieve maximum profitability. We recommend spending no more than 50% of your revenue on labor. Those costs include salaries, benefits, HR costs, onboarding costs, and any other costs that are directly associated with hiring or maintaining employees in your workplace. If you keep your labor costs under 50%, you’ll have a good cushion for ensuring that your small law firm can reach that 20-30% profit margin range.
Here are some tips for improving law firm profitability
Streamline administrative processes
One of the biggest money-wasters that law firms engage in is having their attorneys do non billable work that should be outsourced to more cost efficient labor. If your attorneys are doing billing, marketing, or other administrative activities, it’s time to change that. Your attorneys’ hourly cost is probably much higher than the cost of outsourcing, but also, you should consider whether your attorneys are the right person for the job in the first place. In most cases, outsourcing these tasks isn’t just cheaper. It’s also more effective since you’d be hiring specialized labor in those areas, with experienced professionals who are actually better at doing that job than your attorneys are.
Embrace technology
New tech tools can go a long way to reduce labor costs and improve your profitability. Investing in practice management software to automate routine tasks like time tracking, billing and document management can significantly reduce the amount of time your attorneys spend on administrative work. Plus, it can help minimize errors and improve accuracy across your different processes.
Optimize your law firm's billing process
Collection rate is a profit margin killer! If you’re struggling with a ton of past due invoices or a lower-than-optimal collection rate, re-evaluating your billing process could mean a huge boost to your firm’s profitability! Making changes like billing your retainer up front using trust accounts, utilizing automated billing, or even just adding more automated reminders can be a huge help when it comes to your law firm’s billing process. Here’s a blog that goes more into detail about how you can make those improvements.
Invest in marketing with proven ROI
Investing in lots of different marketing tactics can be a great way to reduce dependency on just a few platforms. At the same time, you’ll want to make sure that you’re investing in the tactics with best ROI in order to really optimize your investments for profit. We recommend utilizing your financial reports in order to create a comprehensive marketing budget that breaks down different marketing tactics and what you’ll invest in each.
Ready to improve your law firm profitability?
Legal Ease helps attorneys and small law firms improve their profitability every day by providing clear, accurate, and up to date data along with advanced financial reporting and analysis. Together, we help attorneys make decisions that will drive up profits today and help them maintain those gains in the future.
