How a Bookkeeper Can Help
A Law Firm's Profit Margin
by Brandy Derrick
(Guest Author From LegalEase Bookkeeping LLC)
Bookkeeping is so much more than entering data into accounting software.
Reprinted with permission.
Recently (December 2017) Attorney at Work discussed how tracking numbers can help lawyers save money and even make a profit. In short, the idea is that a lawyer needs to measure certain things in his or her practice in order to see if it is growing. These key performance indicators can reveal which areas of the law practice might need work.
3 Items Important to the Health of a Law Practice
1. Referral Sources: The first item to track is simply the source of new clients– how did they find the law office? By a referral? An ad on Facebook? A billboard? By discovering these sources, the lawyer can refine and focus his advertising efforts with ease, leaving behind the tools that aren’t working.
2. Profitability:The second indicator is the actual profitability of each case or matter. Good lawyers know how much profit they will make, not just how much they are charging. Profit will be the money received after the expenses are paid. Obviously, a tracking system will need to be in place for this, as well.
3. Realizations Rates:The final item to track is the money the lawyer ends up collecting from clients, called the realization rate. Unfortunately many times the lawyer will bill for 20 hours and only get the money for 15 hours. He needs to take this into account when he is reviewing his work. In a perfect world, the full amount due would arrive every time, but alas, that world doesn’t exist.
These three items are very important to the health of a law practice, and should be tracked with a great software and/or system. However, who has the time to make sense of the results? Busy lawyers need to spend their time practicing law, not calculating numbers and drawing conclusions based on data. Anything not law related should be outsourced, or the law office will see a big reduction in profits.
Best Method to Make Sense of the Numbers
The best way to make sense of the various numbers these software programs produce is to hire a great bookkeeper to do the interpreting and number gathering. Remember, if it gets measured, it will get the proper attention.
Lawyers are busy, busy people. They market, they read, they study, and of course, they work on cases. A great way to measure whether a lawyer is good at his job is to compare his revenue with other similar lawyers. He must be sure he is maximizing both his time and money to make the best profit while at the same time making his clients satisfied with his work. Hiring a secretary, office manager, and a bookkeeper can really be beneficial. These jobs will free the lawyer to do the higher level work that he set out to do.
Many small law practices don’t have need of a full-time, on-site bookkeeper. Neither do they need to hire a CPA to do their weekly and monthly financial tracking. Hiring a contract bookkeeper is the best choice for practices that make less than one million dollars annually. A contract bookkeeper can become a lawyer’s best friend in a sense, because he or she will be quickly able to answer questions and find financial information.
Now, tracking Key Performance Indicators (KPIs), and hiring a great bookkeeper are both vital pieces to the law office practice. How do these two pieces fit together? Can a bookkeeper do
The Income Statement, Balance Sheet, and Statement of Cash Flows
A great bookkeeper creates three special reports each month, based on the financial activity that has passed through the law office during that time. She (or he) will use those reports to discuss with the lawyer the actual health of his practice. She (or he) specializes in law bookkeeping in order to sharpen her knowledge of the special bookkeeping needs this area requires.
Bookkeeping has become so much more than entering data into accounting software. A great bookkeeper will take the reports the software helps to generate, and turn them into real, KPI tracking, result producing tools. The lawyer and bookkeeper can discuss the numbers, what they mean, and how to make them adjust to fit the practice next month. Read on to see how these reports can be used to measure referral sources, profitability, and realization rates.
To understand how a bookkeeper interprets data, the lawyer must first realize what each report is saying.
First of all, the Income Statement tells him how much money he earned during that time period. This information is useful, because he can then see his profit from the marketing and billing that he did over that same period. If the lawyer advertised on a highway billboard in March and made a higher profit that month over February’s profit, she can conclude that the billboard was a success. If she had a lot of expenses in the month of July, the lawyer can conclude that her cost per matter is too high, and she needs to find areas to cut back.
The Balance Sheet tells the practice exactly what it owns, how much it owes, and how much equity it has at any given time. These numbers will change from month to month, so a savvy lawyer will compare them (or better yet, let the bookkeeper do this) to decide how well his business is doing over time. A lot of unpaid bills to vendors show the lawyer that he needs to convert more equity into paying debts. A lot of property/assets show her that she might want to cut back on purchases for a few months. A lot of equity shows that the practice is thriving, and should continue doing what it’s doing.
Finally, the Statement of Cash Flows helps the lawyer see exactly what money went through his practice that month. How much money came in? Where did that money go – to investments, salary, and bills? Is there any outflow that looks too large? Is she spending too much on any certain expense, like rent? Having this useful report will really give a lawyer the information needed to track KPIs correctly.
Each month, the bookkeeper uses these reports to help measure the health of the law practice, then has a discussion with the lawyer to inform him of the results. Just like a student in school needs to know their test scores, a lawyer needs to know the health “score” of his business. Why not partner with a great bookkeeper now to get your KPIs in place, and see amazing profits next year?
About the Author
Brandy Derrick is the owner of Legal Ease Bookkeeping, LLC. in Sunnyvale, Texas . She started her own bookkeeping practice so she could help small law offices grow. She gives attorneys the power to grow their firms by providing sound bookkeeping and financial planning.
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