The Six Month Financial Checkup
Here we are, midway through 2023. Soon you’ll be sitting down to do your monthly reconciliation for June. You may be prepared to ease into your usual steps and call it done. Instead, we recommend taking a little time to check the pulse of your firm’s financial health.
- How well have you stayed on track to meet your 2023 profit goals?
- Is there anything you could be doing better?
With half of the year in the books, this is a terrific time to find out where your firm stands. Plan to set aside some time at the beginning of July to evaluate a few of your firm’s financial metrics and law firm profitability. This will help provide you with a better picture of what is working and what changes you need to make to meet your financial goals. Better to find out now, before you plow through the next six months of the year.
Are you Profitable? Here’s how to answer that question.
Before January even began, you initiated a plan. You had a budget. If you aren’t consistently reviewing the budget compared to your actual monthly expenditures, start building the habit for the second half of the year. If you haven’t made a budget yet, it’s not too late to build your financial road map for the rest of the year. We’ve even included a sample budget tracker to help you get started.
Let’s begin answering the big question by breaking down your financial data and key metrics. These questions are designed to help you focus on the different elements of your business.
- Are you paying yourself a monthly salary? There can be pressure for you, as a practice owner, to undercut yourself in favor of other firm expenses. When budgeting for your firm, make sure you’re including a reasonable monthly salary for yourself including your payroll taxes and retirement for yourself. Don’t fall into the pattern of randomly taking money out of the business when it looks healthy enough to do so. This is not sustainable for your firm, for you, or for your family. It can also be a very slippery slope leading to commingling of funds and an eventual audit by the IRS.
- Do you know your monthly nut? Nut is a term we use to refer to your firm’s regular monthly expenses. These expenses should include payroll (yourself included) and other regular overhead costs like rent, utilities, office supplies, etc. Each month, your goal should be to surpass your nut in income.
- Try this: Calculate a month’s nut at the beginning of each month. Place it in a prominent place to keep that goal top-of-mind all month long. Once you hit that number, everything else is profit for your family and your future retirement.
- Does your budgeted income number account for your firm’s actual collection realization rate? Your budget should show your projected monthly income. As you look back over the first six months of the year, have you been meeting your projected income?
- Keep your firm’s actual collection realization rate in mind. Just because your team has earned/billed for $5,000, does not mean your client will pay the $5,000. Your budget should take this into account. Now might be a good time to re-evaluate your budgeted numbers for the remainder of the year.
- Take a moment to calculate your firm’s collection realization rate. Take your actual income for the first six months and divide it by your total amount invoiced for the first six months. If it seems a little low, don’t panic. Performing this check-in informs you that it may be time to make a few changes to your billing habits and how you are tracking your accounts receivable. Set a goal with your team to increase your collection realization rate by 5% each month. An increase of 5% can yield additional money without billing more time.
- Where do you stand mid-year in terms of profit and loss? In other words, do you know how your actual numbers compare to what you budgeted? Your Profit & Loss Statement (or “Income Statement”) is your go-to report for comparing your revenue/income to your expenses. You may very well need a month-to-month comparison, i.e., April to May, May to June. While you may have progressively billed more each month, that might not mean you’re on track for making a profit for the year compared to your projected budget.
- Do you generate and review a cash flow report each month? Your cash flow report is a great way to keep an eye on your firm’s actual checking account balance. When you are reconciling each month and updating your budget/financial tracking spreadsheet (mentioned in #4), you will be able to clearly see how much cash you have on hand. This gives you the data you need to make decisions about your business expenditures so you can be proactive rather than reactive.
- Do you know your average hourly rate? Take a moment to consider how many hours and dollars you are billing each month. Billing is a key component of your firm’s monthly activities. Knowing how much you are billing each month and any trends will help you more accurately project your firm’s financial success. Give yourself the information you need by consistently tracking your billable hours and bill promptly and regularly.
- How many new matters are you setting up each month? This question helps you evaluate your throughput. How many new clients are coming into your pipeline? Do you see any trends? Do you have an even balance of hourly vs. flat fee vs. contingent? By tracking the number of new matters per month, you can clearly see your firm’s level of growth and project trends for income. If a given month has a low number of new matters, that can mean that you may have less income in the pipeline for the months ahead.
- Do you know what your outstanding accounts receivable at 30-60-90 and +90 days are? Accounts receivable represent an opportunity for additional profit for your firm by ensuring that you get paid for work your team has already done. By setting up or developing tighter receivable management practices, you set clear payment expectations and increase your collection realization rate on those receivables. You are a small business owner and cash flow is important. Clients should understand and respect your business needs. If they don’t, fire them.
Time to Take Action!
If you don’t have a budget or a method to track your firm’s financial data, use July to get started! Build yourself a spreadsheet based on last year’s actual numbers. Compare January-June, month-to-month, and adjust as needed so you are ready for the second half of the year. This is an invaluable exercise and, once done, it easily converts to an annual worksheet.
Improving your understanding of your firm’s financial metrics will help you layout strong strategic business development initiatives and a solid business plan for the year. Having a budget and a plan is critical to remaining competitive and profitable as a solo and small firm attorney.
Need help getting started? CPN Legal’s team of experts is here to help! Reach out to Nicole Tedford at firstname.lastname@example.org.