Careful Working Capital Management…Impact on Your Profit…

When lawyers give any thought to working capital management it is usually in the context of cash flow, and often when there is a problem…

However careful management of working capital can go beyond cash flow issues and impact your profits significantly…

Just one key area for discussion in this post…File velocity…

The issue that causes most concern for law firm managers is ensuring that each fee-earner has enough client file work…getting people to what I prefer to call a “healthy backlog”.

They naturally enough assume that if a person has enough work, there will be appropriate production, and hence fees…and a proper profit margin will be created over the cost of production…

Of course they’re right, as far as it goes…

However what they often overlook is that some fee earners have more work than they really should have, and almost always, the average file velocity drops, so that too much working capital is tied up in those files…

The wider situation can be masked if the fee-earner is hitting basic targets for work done, and billings rendered…good results of course, but still too much working capital is tied up.

How does this impact profit?

At the simplest level it can mean that the firm pays more in interest on its borrowings.

More importantly often it is overlooked that distributing the files better would mean improved file velocity and fees that would not have come in for some time can be billed (and hopefully paid) in an earlier period for the same outlays, very significantly boosting profits because these fees are usually derived in the real profit zone, above break-even.

Cash flow will certainly be improved when the extra fees are collected, and it highlights that while profit and cash flow are intrinsically connected, there are various factors at play, and all need to be managed well.

I trust these thoughts have been of interest and value to you…

I take the opportunity below to remind readers of the KMS workshops coming up, and apologies to those who have already kindly registered, or recently requested Registration forms.

The Seven Biggest Profit Builders in Small-Medium Law Firms…

KMS Australian Workshops CPD…

Most Australian lawyers who are principals in private practice know that the genuine profit returns for principals are not what they should be for the time, effort and funds invested…

Sadly the position has not improved as much as it should have in the last decade or so, despite the vastly improved technology and marketing tools available…

Far too many firms appear on paper to have “done OK”, yet seldom ever have the cash available for principals to fully draw down what they’ve “generated’…

The good news is that it needn’t be like that at all…

Working closely with 1,215 small-medium law firms in Australasia in the last twenty-five years I’ve had the opportunity to observe the major mistakes law firms make repeatedly, and to develop techniques to address them effectively…

As a result firms that have applied the appropriate techniques have gone on to be leading practices in pretty much every suburb, town, region and city…with some growing rapidly to become national firms, and others achieving previously unheard of levels of profitability…

In this new series of workshop across the country I will work with you to examine closely the seven key areas law firm managers can make a truly huge difference to profit outcomes from servicing clients truly professionally…

I’ll lead all the discussions, and there will be ample time for full involvement by all participants and detailed answers to all your questions…

Who should attend?

CEO’s, CFO’s, Practice Managers, Managing Principals, Office Managers, Principals, Associates and any employed lawyer interested in understanding how to make themselves more valuable to the firm and progress their career…

When and Where?

In Melbourne CBD, Brisbane CBD and Sydney CBD… as usual, venues to be advised…

See dates for each city below…

 Brisbane CBD…Thursday October 4th

Sydney CBD…Thursday September 20th

Melbourne CBD…Thursday September 27th

Planned, targeted, marketing a key law firm profit builder

Planned, targeted, marketing…

When we talk profit improvement it’s important that readers appreciate that my position is that most lawyers make far too little profit for their education, legal skills, effort, risk, and dedication.

They do so because they get a lot of things, fundamental things, wrong in managing their businesses.

My mission is to help those who are interested, and willing to change, to get far better results…

Many lawyers spend many hours a day doing things that aren’t particularly useful, including client file work they should not be doing…work that in future it would be better they do not have, replaced by interesting, profitable, work.

In my view your aim in marketing should be to consistently generate far more enquiry than you originally may feel you need, so you open up the fundamentally important option to be selective about the work you accept.

At the outset review what work you really enjoy doing that meets a real need in your markets, will be of good value to clients, so it’s easier to price it profitably for you, and easier to generate the necessary volumes.

You’ll market this work with the most enthusiasm.

Identify exactly where that work has been coming from…Clients, Client Referrals, External Referrals, The Public…there will be many sources but 20% of them will be critical for you.

The failure to carefully record work sources is a major failing in law firms. Not tracking the new work sources, or doing it poorly, robs you of vital information. Matters sources such as “Unknown”, “Blank”, or “Other”, are not particularly helpful, and a bit of awareness training and effort will fix that problem.

Now set goals to close the revenue gaps in your firm, lawyer by lawyer, group by group.

If you have a lawyer involved in Commercial Recovery, with spare capacity of 1.5 hours a day on average, it’s worth at least $575/day and you are losing profit of about $130,000pa.

Work out how many extra files you need to close the gap…and spread the goal for new files across the Source categories according to your thoughts as to what additional marketing efforts will produce results.

You’ll find that a few extra files here and there across a number of categories is often all you need to close the gaps for a huge profit boost, and is not all that hard to achieve with planning and focus.

You might need more newsletters, more client visits, more seminars, improved website content (usually not a new website!), more “How’s Things’ calls to key clients and referrers, more short quality emails to clients and referrers, and in certain circumstances, some pay Per Click Internet advertising. There is an ever-growing resource list of nearly 60 Tools of Business Development on my blog for you…the link is in the signature block to this email.

Then monitor results very closely so you have the accurate knowledge to manage going forward.

It’s worth noting that I observe percentages of work sources within even General Practice small firms vary greatly, consistent with location and what efforts are already underway.

Traditionally well over 80% of all new matters in such firms came from Clients and Client referrals…essentially because very little marketing was going on.

As you do other things in marketing you may well see those percentages drop but it’s not a bad thing if the gross numbers increase.

So, if you don’t do much information flow to clients or referrers, but have a reasonable spend in Pay Per Click advertising, you may well see “Internet” as a source rocket up to 20% of total new files.

A quick KMSProfitPower™ Tip here…I’d be splitting source codes wherever you need to, so Internet will split into Generic Search Internet, and PPC Internet, and make sure you have simple effective devices for determining in most cases which is which!

The trick is to keep the gross numbers of Client files and Client Referral files growing, while also plugging revenue gaps from less traditional marketing efforts. The new clients introduced will of course become part of a very strong working “mine”.

I trust these thoughts have been of interest and value to you…

The Importance of pricing to profit in law firms

The importance of Pricing…in context…

Pricing is extremely important to profit…most professionals understand this, but not to anything like the extent they need to understand it…

Proper pricing has been demonstrated to have a massive impact on profitability…changing the game by big percentages…100% improvement in profit is by no means unknown…

An example from the hospitality field is easy to relate to…

If two hard-working restaurateurs put in very long hours and manage to earn $150,000 each in a year, that’s actually not more than they would have earned doing the same job for someone else, so they have run a business all year for no profit whatsoever!

If they look at pricing and realise that if they can re-position themselves in the value perception with customers, on their existing “covers” even a $2.50 increase in average cover revenue will give them extra revenue of $150,000 per annum. That’s a 50% increase in what each of them earn…and a whopping lift in profit.

For small-medium law firms there is actually a lot more room to move on pricing in my experience, and firms should look hard at every area of potential.

Importantly this examination must include stopping people on your team who lack proper appreciation, or confidence (or both), from giving estimates and quotes, and from preparing bills.

However there’s an even more important issue staring law firms in the face that they have not dealt with properly.

It doesn’t matter much what you charge on matters if you’re not breaking even…the real impact on profit doesn’t occur there!

Until you reach break even point every single dollar of your fees goes to Expenses, and in Expenses must be included at least the salary principals would get doing the same job for an employer.

After break even almost every part of every dollar in fees goes to the principals, so it stands to reason that it’s critical that people are gainfully employed doing genuinely productive things in that part of each day, month or year.

Up until that point the whole exercise has just been about keeping the doors open.

Sadly, this is where most firms go wrong, and manage to produce nothing at all in the profit zone, either because they don’t realise that their break even point is so much higher than they thought, or because they don’t know how to go about fixing the problem.

Far too many firms still naively think that the old one third/one third principle is still appropriate.

One third was for wages, one third for other expenses, and one third for principals. Ridiculously, the one third for principals was referred to as “profit”, when in fact it very often was not even a decent wage.

The reality for most small-medium law firms today is that after allowing a genuinely appropriate salary for principals, there is less than 15% true profit, and very often none at all.

However, if we assume there is 15%, and that represents for example, $50,000 per principal, it is quite easy to lift it by 100% or 150%, taking true profit up to $100,000 or $125,000 a head on top of salary.

I would start by looking carefully at employee utilisation, making sure good things are happening in the profit zone, and at the same time I would address the highest priority pricing issues...ironically, often the easiest ones!

The most important issue to address is lifting ClientTime budgets up to where they need to be.

Become one of the well-organised firms that has people meeting or exceeding these sensible budgets. Budgets that are too low, and still not achieved, are not going to do much to build your practice profit, and that's the situation in most law firms.

I would improve the quality and volume of marketing activity, so there is increased demand for services and pricing changes are easier to make, and there is a healthy backlog of work for all at all times.

Improved pricing, and some operations incurring in the profit zone on that better pricing, will have a huge impact on profit.

Unsurprisingly, in the restaurant business, if you can increase pricing a little, and have fewer tables empty on average across the year, profit will also be impacted hugely. Empty tables produce nothing in the profit zone, and increases in pricing have little impact when they're at empty tables!

I trust these thoughts have been of interest and value to you…