Attorneys and small law firms must measure the continuous success of their firm. The best way to accomplish this is by analyzing firm’s financial key performance indicators (KPIs). The challenge then occurs when trying to determine the best metrics that will help propel the firm to the next level.
Below are three financial key performance indicators for attorneys and small law firms:
When choosing your firm’s financial KPIs, you must first ensure that each have the following characteristic:
- Be quantifiable – you must be able to numerically measure the results
- Reflect the firm’s strategy and goals – the KPIs must align with your desired direction
- Propel the firm’s towards success and increase profitability faster and smarter – as you begin to receive the numerical results of your chosen KPIs it must lead you to make wise business decisions ultimately resulting in reaching your desired level of success
While the three financial KPIs below are not all-inclusive this is a great starting point for small law firms:
- Receivables Turnover
This is when you identify on average how quickly you are receiving payments for services render. Many times attorneys are earning money; however, they find themselves in a cash flow crunch. This could be the result of slow paying or worse case no paying clients. To compute your receivables turnover ratio and the number of days before most of your clients process their payment review the formula below:
Total Sales / Total Accounts Receivables = Receivables Turnover Ratio
Then to compute number of days the formula is
365 Days / Receivables Turnover Ratio = # Of Days Of Open Invoice
If your number of days For Open Invoices is high this means you have a collection problem. You are completing the work, invoicing the clients but you are not following up on payment status continuously.
- Unbilled Days
If you are wondering how you are leaving money on the table this KPI will identify that. Unbilled Days are the number of days within one year that a firm did not collect revenue. As the CEO you should be spending 95% on your time on revenue generating activities. If you find that you are busy, however your bank balance is not increasing it could be that you are busy working on the wrong activities.
To calculate unbilled days divide your total sales by the average billing amount per day.
Example – Total Yearly Sales/ # Of Days Per Year
- Measure of Profitability
This determines how the firm’s daily activities contribute to the bottom line number. As I’m sure you are aware that revenue is that top line number and profit is your bottom line number. In determining your measure of profitability you want to factor in the following
Profitability By Specialty – how much profit are you generating per service line
Average Net Overhead – the cost that must be covered before profits can be produce
There are additional KPIs that we will cover in later articles such as
- Revenue per employee and office space
- Net income as a percentage of revenue
- Percentage at point of billing
- Operational KPIs
When determining the best KPIs for your growing firm it is my recommendation that you consult an accounting professional that specialize in helping attorneys and small law firm accelerate business growth. This individual should be capable of helping you clearly identify your growth pattern and best metrics
Octavia “The Profit Maximizer” Conner is a profit acceleration specialist, accountant, business adviser, speaker and best-selling author of the book titled Say YES To Profits: 3 Methods For Building The Profitable, Successful Business Of Your Dreams.
She is the CEO of Say YES To Profits, an accounting and business advisory firm that specialize in helping growing service-based businesses plug money leaks, increase cash flow and maximize profits faster, smarter and consistently.
Octavia is not your ‘typical accountant”. She works proactively with her clients as a business development partner, helping them double (even triple) their bottom line within the first 90 days of her guidance. She has been featured in YFS Magazine, Women Creating Wealth, the Atlanta Business Chronicles, Smart Hustle Magazine and many more.
For more information contact her team today at SayYESToProfits.com
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