Fingerprints are unique. No two snowflakes are alike. And the more one looks at law firms, the more it is apparent that each law firm has its own personality. Whether small or large, local, national, or international in scope, general service or specialized boutique, driven by profit or public service, each law firm has its own DNA.
Though distinctive, many law firms share common characteristics. One shared by all law firms is the need to be financially healthy. Law firm financial health is the universal need of every law firm—without financial health a law firm’s future is seriously suspect.
Absent a solid financial footing a law firm cannot sustain itself. So as 2019 is getting started and thoughts of spring-cleaning take hold, there is no better time to make your firm’s financial health a priority. To get there, four key financial and management elements should become integral to every firm’s go-forward planning. This is true no matter a firm’s practice, its size, location, or focus.
Manage Debt and Capital to Appropriate Levels. A law firm’s financial health is greatly impacted by the debt it carries and the invested capital maintained. The incurrence of debt in moderate amounts can be helpful, but too much debt can create a burden that undermines stability. To the extent physical assets (furniture, fixtures and equipment) are financed the amount of debt should not exceed the unamortized asset value. While working capital debt may smooth out cyclical revenue realization for a firm, relying too greatly on credit lines can prove troublesome and signal the need for more capital. Moreover, maintaining adequate capital in the firm should not be an afterthought. Being the opposite of debt, capital at appropriate levels can provide a firm with a healthy financial profile.
Strictly Manage the Creation and Collection of the Firm’s Inventory. A law firm will struggle if it does not generate sufficient revenue. No doubt having a great client base helps. But developing a steady stream of revenue also can depend on having systems and processes that manage client intake, time entry, sending out invoices, and collecting bills. Having such systems and processes is not enough. The firm must have the ability and discipline to assure firm-wide adherence. This means that the firm’s professionals must understand that there are adverse consequences if they fall short in complying. Hands-on inventory management greatly contributes to financial health.
Create Expectations About Productivity and Manage to Expectations. Underperforming professionals can hurt greatly. An important step to achieving financial health is the prompt and effective management of overcapacity. Responding to underperformance is best handled by clearly articulating to all personnel firm standards and expectations, monitoring each person’s performance against expectations, and taking proportionate measures when expectations are not met. Adjusting compensation, coaching, supplementing training, or departure management are some of the proactive measures available. Consistent management of the firm’s human resources is essential to financial health.
Understand and Manage the Value in the Firm’s Productivity and Inventory. All client work is not created equal. Some is more profitable than others. A smart firm pursues only the client work that contributes to its financial health. All client work should be reviewed to determine if it is accretive. Similarly, personnel and the work they do should be reviewed for their contributions to firm financial health. Personnel whose contribution to firm revenues is exceeded by their cost (compensation, benefits, overhead), generally are not helpful. On the non-human side, all costs the firm incurs should be analyzed and questioned. While some intangible contributions are inevitable if not irreplaceable in most firms, a close examination of the margins associated with the work a firm does and the personnel that do it can help eliminate unnecessary soft spots.
Every firm seeking success should stay focused on these four areas that directly impact financial health. Is your firm giving these areas the right amount of attention?