Updated: Oct 14, 2021
Managing a law firm is totally challenging to every single lawyer. When it comes to the financial aspects of a business, it doubles the burden since lawyers are not trained in finance in law schools. If you are looking for ways to make your business more profitable, these are some tips recommended to you to improve your firm’s finances. The major aspects we target in this article include Business Planning, Cash Flow, Billing Practice, Costs & Expenses, Attorneys’ Compensation.
1. Business Planning
Any business requires a business plan to start and grow. Law firms are not an exception. A good business plan suggested for law firms should consist of financial management strategies, defining short-term and long-term goals for certain periods of time. At each stage of your plan, just focus on what is going to support the specific targets that you have planned, steps by steps, then move to the next goal. Don’t be the one who “chase after the next big things”. For example, if you’re in staff shortage and your current target is to get 3 more members, then your focus should be hiring instead of trying to acquire more clients than you can handle.
Depending on your firm’s performance and relevant factors affecting its operation, your goals might change over time.
2. Cash Flow
We all know healthy cash flow means a healthy business. The importance of effective cash flow management is therefore vital to any business including law firms. You need to take time to monitor your business’ cash flow on a regular basis through your firm’s financial statements. If you’re afraid of numbers, now is the time to learn how to read financial reports. Please refer to our previous article “Tackle your fears about law firm accounting” to get the basics of those financial reports.
By monitoring your cash flow carefully, you could identify any unusual spending or areas where you can reduce the costs or focus to improve profitability.
3. Billing Practice
Cash flow maintains the survival of any business. For law firms, adopting effective billing practices is also a good way to improve your cash flow. Good billing practices result in faster payments from your clients. It obviously has a positive impact on your firm’s profitability and cash flow. Lawyer-initiated, manual billing is still used by some lawyers but it has proven to carry many disadvantages. It’s better to have a billing system in place to generate invoices automatically and accurately.
Here are some good practices and their benefits:
Information centralized and invoice automatically generated: Reduce human errors when creating the invoice manually
Set up your monthly target for sending invoices: avoid forgotten unbilled hours and client matters serviced built up
Prompt & regular billing: accelerates payments from clients
Invoice sent out timely with well-organized layout: Maintain your reputation as an effective & professional service. You should check your invoice formatting to make sure it clearly states the payment due date and who to contact for questions.
Use auto invoice reminders: auto-reminder is set up for invoices not paid within a specified period of time. This reduces stress and anxiety from follow-ups with past-due payments. If your system does not allow you to set the auto-reminders, your firm’s collection process should include targets to send out invoice reminders, do follow-ups, etc.
4. Costs & Expenses
One way to improve your financial numbers is to reduce your expenditure. You can review the costs and expenses of your firm in the past months or last year to see areas where you spent your money. If you have an accountant or bookkeeper, ask them to provide you with the financial reports which are customized for your need for details. Consider where it is costly yet does not bring much profit, e.g. advertising in certain media channels, clients who are consistently late in payments. It is possibly time for you to make a change. Also identify areas where you can potentially cut costs such as hiring/recruitment fees, facilities’ expenses, advertising & entertainment expenses, etc. A good example of cost-cutting is to negotiate new rates with your current vendors/service providers.
5. Attorneys’ Compensation
Another way to make positive changes to your finance is your compensation system. Reasonable compensation not only improves the performance of your staff members but also helps maintain your law firm’s stable growth. Defining the core values of your firm, get your team to fully understand and stay consistent with them. These are the essential beliefs telling you what is truly important for your firm and directing your firm forward.
A good compensation model does not emphasize the individual member and cause unnecessary competition, instead, it rewards all members fairly for staying true to the law firm’s values. One of your important responsibilities is to pay your employees a fair market salary together with reasonable bonuses for the entire team when specific goals are met.
Your Values and Services
Whatever business plans or methods you intend to apply to your firm in the hope they could help you to improve your financials, the key to your successful business is not those financial controls. The strength of your business lies in the core values to which your whole team is dedicated resulting in the quality of services your firm provided to the clients. In your path of seeking different ways to enhance your financial numbers, do always remember the primary focus must be your service, the best practice that will be maintained throughout your firm’s development and survival.