Management, Not Money, Is Key to Law Firm Success
Many lawyers who want to get ahead in their law firm should know it’s not all about making money. While that can be a useful measuring stick, all the money in the world doesn’t translate into the success of a law firm. What a lawyer should be looking for is management success and how this can translate into boosting their law firm finances, thereby making their law firm a success through effective management principles.
It takes more than money to increase profits
The first thing that you need to understand about law firm finances is that they are not the same as personal finances. While it’s true that profit is a measure of the value of a company, in law firms it doesn’t necessarily show how much money can be made by increasing revenues or reducing expenses—the key to increasing profits.
For example, if your firm had $1 million in revenue and $100,000 in expenses per year, you would most likely increase profits by increasing revenue (assuming there aren’t any other costs associated with this) or decreasing expenses below $100k per year (again assuming no other costs). But if your total revenue was only $500k for that year and all of that revenue was already spent on salaries and overhead before earning even one cent toward profitability then there would be no way for this firm’s earnings potential to grow unless it could somehow find new clients who are willing to pay more than what everyone else has been paying so far.
Processes are key to a firm’s success
Processes are simply ways of doing things. They allow you to achieve your goals and avoid mistakes. Processes also help make your business more efficient and effective, which will lead to profitability. Law firms need to rely on their processes in order bolster their reputation and retain their clients, as well as quickly onboard new ones.
Financial reporting is a measure of a law firm’s health
Regardless of how much money a law firm has, how it manages its finances will ultimately determine the success of the firm. When you talk about financial reporting as a measure of a law firm’s health, it’s not just talking about dollars and cents. Financial reporting is more than just numbers; it’s a process that helps you measure your success in managing your practice by guiding where improvements can be made.
Revenue is not the same as profit
In the world of business, revenue is the amount of money a company brings in during a given period. Profit is what’s left over after all expenses are paid. Profit—not revenue—is what makes a business successful. Profit pays for things like health insurance, retirement plans, and other benefits for employees. Without profit, a business cannot pay its bills or continue doing business at all.
Revenue alone tells you nothing about whether your law firm is making money or losing it: In fact, a positive revenue can have negative profitability; when this happens, your law firm loses money even though it brought in a lot of revenue that month or quarter.
Strong management and good process produce results, not just high hourly rates.
While it may sound counterintuitive, the best way to improve your law firm’s financial performance is not by focusing on increasing your hourly rates. Instead, you should focus on improving the efficiency and effectiveness of your processes and management system.
For many law firms, this means going back to basics: asking themselves what their clients want from them and then creating systems designed to meet those needs as efficiently as possible. If a client doesn’t need something that costs money—for example, if a particular practice area isn’t profitable for them—then don’t do it. The key to success in the legal industry isn’t about charging more for services; it’s about providing better value for money in everything you do.
Good management is key to law firm success, and it’s something every firm should carefully consider when making every decision—from hiring and training new associates to upgrading to a new practice management system. While it’s true that money does buy talent, it doesn’t guarantee success; that all starts with management.