Driving Profits Up
by Barbara Lewis MBA and Dan Otto MBA

There’s 50 ways to pump your profits.   At a time when law firms are squeezing every drop from potential revenues, profit builders can contribute to the bottom-line.  One of the best ways is to collect what you bill.  To ensure a high realization rate (the percentage of billed compared to collected amounts), ask for a substantial retainer, so that little money is at risk at the end of the engagement.  Clients balking at the upfront retainer may portend future problems.        

When collecting monies due, let your office manager or bookkeeper handle the task.  Your time is better spent billing and it’s much more profitable for you.  Calculate your average collection days: divide last month’s billing by the number of days in the month to yield your daily billing rate; then divide your total accounts receivables by your average daily billing rate to calculate the average number of days required to collect on your billings. This establishes a benchmark and then allows you to set a goal.  A good target is 45 to 60 days.    

The format of the invoice can enhance collections. Research indicates that putting the due date on the top of the invoice, as well as at the bottom where the amount due is located, will accelerate payments. 

Another way to increase profits is to cut expenses.  Close monitoring of monthly expenses and comparing to the monthly budget can indicate areas where expenses are out of line.  A review of line items in the development of the budget can reflect expenses that are unnecessary.  No budget is perfect; however, the variances need to be explained and managed.

The largest expense for law firms is labor.  Ensuring that the right employees are performing the right tasks and are working at capacity is critical for maximizing profit.  Oftentimes, employees are handling jobs for which they are overpaid.  For example, the attorney’s assistant may be performing clerical work and the associate may be doing paralegal work.  Aligning tasks with the lowest paid competent person can increase profits.  Delegation is the key when employees recognize that their tasks should be at or above their competency.

Salary payment method can contribute to profits.  Paying employees a low fixed salary with a high variable or bonus that is based on performance standards and goals can go a long way toward motivating employees and reducing the firm’s risk of underutilization.  Contract employees can save firms the expense of benefits and overhead.

Outsourcing can be another way to increase profitability.  Bookkeeping, payroll, collection, photocopying and telephony are areas that businesses outsource profitably.   

Research indicates that planning is more profitable than not planning.  Both in strategic plans and in marketing plans, business and law firm studies, respectively, reflect that planning can have a substantial impact on profits.  In fact, law firms with marketing plans can nearly double profits compared to firms without plans. 

The core of a marketing plan is the database.  Firms that have integrated contact databases with financial information have a goldmine at their fingertips.   Historical information on the industry of clients, referral source of clients and the types of matters, plus the trends in each of those areas over several years, is the foundation of the future marketing plan.   Using past successes in marketing, based on the data analysis, can save time and money in trying marketing techniques and targets that may not work and degrade to the firm’s profitability. 

Average law firm profits are 33 percent prior to partner draws.  However, firms that continually drive profits by implementing profit boosting programs can increase that amount substantially.