Develop a System to Gauge Financial Winds
by Barbara Lewis MBA and Dan Otto MBA

The optimum way to manage any business is to establish measurement systems that will track success indicators and highlight areas for improvement.  Finance numbers tell part of  the story and are  the first place to start when determining the health of your firm and developing measurement systems.

The profit margin (gross revenues minus expenses divided by gross revenues) is, on average, 30 percent among U.S. law firms  (before partner draw) and can be as high as 65 percent among small law firms. At the very least, firms should aim for a 30 percent margin. The firm that’s operating at a 10 percent margin is doing something wrong. It may be overstaffed, underpriced, or its expenses may be too high.

Expenses have a way of getting out of hand unless measured on a monthly basis.    The firm that is spending over 80 percent of all expenses on salaries or over 20 percent on rent is probably paying too much.

Revenue can be measured by matter, referral source, industry of client, amount by client and many other ways depending upon your goals. When one firm discovered a huge jump in revenues from a specific industry and matter type, they successfully  altered   their focus to capitalize on the trend. Only when a mid-sized firm saw that 50 percent of their revenues were less that $1,000 per client, did they recognize that they were losing money due to the high costs incurred by working with small clients.

Personnel ratios for law firms assist in measuring how many staff, secretaries, paralegals and associates there should be in relation to one partner. Three associates per partner is the about the best ratio for optimal profits.  Before computers, one secretary to one partner was the norm. However, because many partners now  work   on their own computers, today’s standard can be as many as three partners per secretary.

Measuring the level of task performed by each employee is critical for improving profits. Because computers have taken over much of the work, today's secretaries are doing more filing and clerical work – tasks that could be performed by a lower salaried employee. Asking all employees to submit time sheets for a typical week will determine whether making adjustments in who does what could dramatically increase profits. 

For some firms marketing is a black hole.  If you’re not measuring where your new clients come from, you can’t attribute any to marketing.  A database should indicate a referral source or a "marketing event," such as a seminar, article, etc. for each client. Annual or semi-annual analysis can reflect what’s working and what’s not in the marketing arena.

All the measurement systems in the world will be wasted unless reports are generated that detail the numbers. A monthly review of financial functions and a semi-annual review of operations and marketing reports will ensure optimum management and influence the success of a firm.