Part II: Key Metrics to Review for Profitability
We are closing out 2022 with blogs to focus on measures to track profitability. We talked about reports to prepare for 2023 in our last blog. Now let’s talk about some key metrics to have in place for 2023 and review on a regular basis.
Understanding which key metrics you might consider tracking. Metrics are critical to remaining profitable as a solo and small firm attorney. If you are new to tracking these, consider picking three or four to start.
Here are six key metrics you should track for 2023. If you have never setup a way to track and review these key metrics, this spreadsheet will help you get started.
- Track the number of new matters you are getting by type: flat fee, hourly, contingent and pro bono
- In some states, you can earn CLEs for pro bono cases!
- Track number of hours being billed on hourly cases and flat fee cases
- Your average hourly rate on billed matters
- This will show if you are discounting or writing off too much.
- How much collected each month (revenue from cash flow worksheet)
- Collection realization rate: what % of billed revenue did you collect
- Money not coming in: How much money are you leaving on the table every month in A/R
Metric 1) New Matter Tracking
How many new matters did you set up each month and what has been the trend? Did the pipeline stay full for continued cash flow? If you have good law practice management software, this information will be right at your fingertips.
You want to look at the balance between your types of cases. Too many contingent cases will create very uneven collections since these cases have a long life. They incur a lot of expenses out of pocket. Hourly cases should be generating a nice flow of income if you are billing regularly. If you manage flat fee cases, it’s important that you are, not only profitable but, profitable at a decent hourly billing rate. Flat fees also mean you may have to manage the flow of this money between your trust account and your operating account, creating invoices and paying yourself at certain milestones.
Tip! If you have a significant number of contingent cases and find your monthly cash flow having too many valleys, open up a firm savings account and deposit a portion of your next contingent fee in this account. Move it over to your checking account as needed to cover your monthly nut.
Metric 2) Billings Each Month = Cash Flow!
Knowing how much you billed each month will help you visually see how your billing process works. Take it a step further and break it down by hourly and flat fee cases. Knowing how much you billed every month and looking for trends may help you identify other weaknesses. This could be a great goal for next year.
Metric 3) Average Hourly Rate
The last line of the above chart looks at your average hourly rate.
You quote an hourly rate. You bill at that hourly rate. You have flat fee cases thrown in the mix. Doing the math and seeing your actual average billing rate for could be interesting data to review.
What may affect this key metric?
- Are you discounting bills at the time of billing? Don’t discount too quickly, assuming the client will have sticker shock. If the client does ask for a discount upon receiving the bill, you can entertain it then.
- Neglecting to enter your hours on flat fee cases will over-inflate this rate.
What’s the math? Your average hourly rate is total hours entered for the month divided by total dollars billed.
Metric 4) Money Collected
The number that you are watching every day and losing sleep over every night. This is the number that needs to equal your monthly nut each month. This key metric may be the one you watch the closest but keep in mind #1 – #3 are affecting this number. You can’t collect if you aren’t billing regularly.
Metric 5) Collection Realization Rate
The last line of the above chart looks at your Collection Realization Rate.
You are doing everything right in #1 – #4, but you still might not be profitable. This means your collection realization rate is off.
The financial health of your law firm or any business is ultimately dependent on three simple concepts:
- Getting the work
- Doing the work
- Getting paid for the work
You need to keep a steady flow in all three components and monitor your results to make sure your business is financially healthy.
Envision a pipeline with a steady flow of water. At any point in the pipe when the source of the water slows down, a clog occurs in the pipe or even a leak, the output will be affected. All three work together in order to keep a steady flow.
Your ability to collect what you billed is not only a financial indicator but quite often it is a measurement of your client’s satisfaction with the work product. At the heart of it, the collection realization rate and the rate of payment is a direct correlation to your client’s level of satisfaction and your profitability. Happy clients pay their bills.
What’s the math? Your collection realization rate is the percentage of your billed fees that were collected.
Metric 6) Money Stuck in Accounts Receivable
What may affect this key metric?
- Lack of good communication with clients
- Not trusting your gut on client selection
- Not billing regularly resulting in larger bills with multiple months of time and expenses
- Lack of process for following up on A/R – delegate!
Whatever the reason may be, having this information to review is an opportunity to make improvements. This is an area that can yield you additional profits without putting in longer hours, simply by tightening up good receivable management practices. You are not in the business to extend credit and make loans. Set expectations with your clients’ early on regarding payment of invoices. You are a small business owner and cash flow is important. They should understand and respect your business needs. If they don’t, fire them.
Do now: One thing you can quickly do is an analysis of your owed balances that are in excess of one year. These past-due accounts have little chance of collection. Weigh these amounts to determine whether further pursuit is the best use of time and resources or would it be wiser to write off the losses and move on.
Call To Action for 2023- Reviewing this data for and understanding these financial metrics will assist you greatly with strategic business development initiatives–all of which are critical to remaining competitive and profitable as a solo and small firm attorney.