Profitability Analysis: Revenues/expenses
| Publication year | 1990 |
| Pages | 1833 |
1990, September, Pg. 1833. Profitability Analysis: Revenues/Expenses
Today law firms are facing highly competitive environments in which clients are sophisticated and more selective about the representation they choose. There is more pressure for quality legal products which require attorneys to sustain good profitability margins by using new and creative techniques. Lawyers also have to be able to understand, and pay attention to, financial reports relevant to the economic stability of their practices.
Reviewing leverage (the ratio of partners to non-partners) can provide you with a lot of information. Is your firm top heavy? New alternatives are being offered to associates today to reduce partnership tracks. Bonuses, enhanced benefit packages and better working conditions are some of the ideas firms have implemented to satisfy attorneys and minimize the desire for the partnership track.
The concept is to make staying an associate look more appealing, emphasizing less stress and greater economic benefits. If you are burdened with too many partners, each taking their share of the "profits," there is little left for those at the bottom of the pyramid. This results in a less motivated staff. It also results in less capital for investment, which will ultimately affect growth. In the future, fewer partnership tracks will be offered and partnerships that are offered will take longer to attain.
Ratios can be excellent working tools for manipulating the firm's financial soundness. Look at the average amount of money collected per attorney per month. Compare that to the average amount billed per attorney per month. Divide the former into the latter to get the realization rate. The average hourly billing rate can be determined by dividing average amount billed by average chargeable hours per lawyer per month. Look at inventory turnover (days it takes to bill fees) and how fast your collections turn over. If these data are not already being tracked in your firm, you are at a disadvantage. If it is being tracked, pay attention to it.
In looking at firm profitability, measuring revenues and expenses are the bottom line. Traditionally, that has been done by looking at the billable hourly rate and the number of hours an attorney is...
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