If you're involved in the legal space, you have probably noticed the changes in the industry that have taken place in the past few years. If you aren't constantly working on scaling your law firm, you are most likely falling behind the competition. This applies to lawyers who are just starting out on their own or legal firms that have multiple partners. To ensure that your firm is headed in the right direction, it's important to follow the three forces that will help you scale your business. The first force is financial alignment.
There's a way that you can quickly and easily scale your law firm without spending extra time or cash. To make sure that you're on the right path, it will take daily, continuous effort on your part. Our law firm CPAs have assisted many other legal organizations with the process of financial alignment, and we can help you discover the financial alignment that will take your firm to new heights. One of the first ways to accomplish this is by utilizing financial forecasting.
It's crucial for your law firm to have a financial goal that you are working towards. Depending on your size, this can be $200,000, $500,000, $1 million or $10 million per year. You'll also need to define a timeline for you to accomplish this goal. You can decide if it's going to take you one year or five years. Once you've got your end goal in mind, you can work backward and provide solutions for any gaps or issues that emerge during your scaling journey. You'll have unique challenges at $500,000 and $2 million. Yet, you'll also have similar issues at those separate levels.
The same goes for the number of employees at your firm. Managing five employees is going to be different than managing 20 and will bring up certain issues, and sometimes, you may just have a mental roadblock that stops you do to the fear of the unknown. It's during times like these when you can rely on our law firm accounting team to lend you a helping hand.
Reinvesting in your business is an excellent way to grow larger and create more profits in the future. However, it can be a common mistake to overdo this and not have enough money when it's time to pay Uncle Sam. We have seen this occur with a number of law firms in the past and suggest opening up separate accounts in a different bank so that it's more difficult to get to your cash thus reducing the chance of you making a snap decision; which may not be the best option for you. One account can be for profits and the other for your taxes. For example, a great strategy is every dollar that comes in, take five or ten percent and put it in either the profits account or tax account. This helps reduce the problem of a cash crunch when it's time to pay your taxes. You're also paying yourself and can use the rest, within reason, to reinvest into your law firm.
Financial Optics And KPIs
Another aspect of scaling your law firm deals with financial optics and Key Performance Indicators (KPIs). After our law firm accounting team helps you set up a 12-month forecast, it's important to make sure that your financials are staying aligned with your goals. To check this, you need to have weekly or monthly KPIs that you can analyze. If you are out of alignment, your firm will need to get back on course, which may require a little assistance from our team of law firm CPAs. In fact, our law firm CFO advisory service provides an unbiased set of eyes that has the expertise and experience to get you back to effectively scaling your operation.
Labor Productivity KPI
For service companies like law firms, you may want to utilize the Labor Productivity KPI. You should be watching real-time information on a per attorney, per unit profit basis. This will allow you to see if your KPIs are getting out of alignment. The Labor Productivity KPI takes the gross revenue generated by an attorney divided by their labor costs and produces a number, which should be a 3 to 4 for the legal industry. This is just one KPI that we look at when assisting our law firm clients with their financial alignment. Our law firm CPAs have other in-depth tactics that can help you during your journey of scaling your law firm.
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