Law firms come in all shapes and sizes. Some consciously specialize in distinct areas of the law while others are more reactionary-willing to do anything they feel generally competent to do. Firms can be local in scope, only serving a home town populace from its home town address. Geographically expansive law firms can have a footprint beyond a single zip code and compete nationally, or even internationally for name brand clients. There can be firms singularly dedicated to making their owners a lot of money while a firm next door might prefer to deliver community based legal services as a non-profit. Profit driven or not, all firms have a universal need to be financially healthy.
Law firm financial health should be a goal for all law firms regardless of culture or objectives about wealth. Even a so-called “life-style law firm” that values a relaxed atmosphere must be mindful about its financial health. It can be relaxed about a lot of things, but disregarding the key elements that make it possible to exist can be risky and unwise.
There are many ways to assure a firm’s financial footing. Certainly, being attentive and focused on dollars and cents issues endemic to any business helps. But being admonished to “keep your eye on the ball” alone does not provide the clarity a law firm leader typically needs. More is required.
Law firm leaders committed to their firm’s financial health would be wise to focus on four fundamental elements of operating a law firm as a business. Understanding and integrating the following four financial and operational components can go a long way to achieving financial health, no matter the firm’s personality, make-up, or culture.
Debt/Capital. The levels of debt and capital at a law firm directly affects its financial health. While some debt may be justified and sustainable, too much can impose a burden that becomes hard to overcome. Purchased furniture, fixtures and equipment should not be financed at amounts over their unamortized asset value. A modest line of credit may be used to counteract cyclical collections (for example, at the beginning of the year), but leadership alternatively could consider increasing the firm’s capital or adjusting draws downward. In virtually no circumstance should a firm borrow to pay owner “profits.” As for capital, having capital levels at a rational ledge can greatly contribute to a firm’s financial health.
Systems and Processes. The mundane world of systems and processes can be an exciting contributor to a firm’s financial health. A firm with a consistent approach to client intake, time entry, sending out bills and collecting bills improves its lie greatly. Having the ability and discipline to monitor compliance with these systems and processes, as well as articulating clearly the consequences for non-compliance, points a firm in the right direction. Finally, having a compensation system that encourages financial contributions of all attorneys is an important feature of responsive firm systems and processes.
Productivity and People. A common malady is underperformance by attorneys and other personnel. Despite lagging performance, too many firms are slow to address the overcapacity that dilutes financial health. Challenges must be addressed by establishing clear standards and expectations for all personnel, monitoring performance against these markers, and taking appropriate measures when expectations are not met. Reducing an underperformer’s compensation, providing him or her improved training, and ultimately, removing the incorrigible from the firm, are effective actions a firm can take to address underperformance.
Margin/Overhead. Client work is beneficial if it contributes to the firm’s financial health. If it does not, it may not be worth keeping. Clients and the work the firm does for them should be analyzed for any contribution to the firm’s financial health. Similarly, personnel who produce the legal services must be assessed for their contribution to the work that generates revenues. A lawyer or paralegal whose contribution to firm revenues is exceeded by the expenditures he or she requires (compensation, benefits, overhead) is not a positive for the firm. All costs the firm incurs in operations should be examined. If expenditures do not directly contribute to the delivery of superior client service they should be questioned.
These financial and operational components are relevant to a firm’s financial health. None can be considered in isolation; rather all relate to each other. They must be brought into alignment around consistent principles that focus on a firm’s financial health. Does your firm exercise that kind of discipline?