Your Business: What You Don’t Know Could Hurt You
By Ann Guinn
Growing up, I bet your Mother told you more than once “What you don’t know can hurt you.” She must have had a premonition that one day you would have your own law firm, because truer words were never spoken about the business side of a law practice. What you don’t know can hurt you.
If you are a brand-new attorney, you don’t yet know what you don’t know. Don’t be embarrassed about this—there are plenty of attorneys with many years of practice under their respective belts who are only just figuring out what they need to know about business—but, don’t. I can relate to this. I have a side-line business in antiques, and I have heard many an antiques dealer say, “The longer I’m in this business, the more I realize all that I don’t know.” The same is true for many small firm attorneys.
So, what must a small firm practitioner know about running a successful law practice? Arguably, the most important point is that a law practice is a business. Your legal services? That’s your product—what your business sells. Macy’s is a business that sells clothing—that’s their product. You own a business that sells legal services—that’s your product.
The more you understand about your business, the more successful it can become—so, it stands to reason that the less you know about your business, the less successful it will be.
Your business provides the framework and support that allows you to provide your legal services. Law school taught you how to be an attorney (although some might disagree with that statement), but nothing about running a business. It’s not until they get out in the real world and open up their small practices that many attorneys begin to learn the business skills necessary to be successful.
Learn all you can about business in general, and about your business in particular. Develop a plan, carefully select your business strategies, get on intimate terms with your firm’s financial statements. Understand your position in the marketplace, hone your marketing skills, become a proactive manager. Never stop learning about business—or about your business.
“All right, already. I know my business backwards and forwards. So, why isn’t it working so well for me now?”
You think you know everything there is to know about your business? Take a minute to answer the following questions, and then let’s talk. [NOTE: This is not an open-book quiz!]
- What were your firm’s revenues last week? Expenses?
- What percentage of your revenues goes to expenses annually?
- How many days does it take you to get paid?
- How many months’ worth of revenues do you have tied up in accounts receivable?
- How much money is currently tied up in your WIP (work in process)?
- What is your realization rate and that of each of the firm’s other timekeepers?
- Does your firm have a written budget, business plan and marketing plan? When is the last time you reviewed each? Updated each?
- How many hours must you bill in a day to break even?
- How many hours did you bill last year? The other timekeepers?
- What do you expect to bill this year? The other timekeepers?
- Which of your practice areas is most profitable? Least? Are you guessing or do you have actual cost/revenues proof?
- What is the true cost of each of your employees?
- What share of the firm’s overhead should be allocated to each timekeeper?
- How often do you review your profit and loss statement? Your balance sheet? Your aged receivables report? What do you do with the information you glean from reviewing financial statements?
- Have you formulated a strategic plan to help you increase revenues over the next five years?
- What trends have you noticed in your overhead expenses over the last five years?
- How do you set your fees? Was your first consideration what your competition is charging?
- How old is the oldest file you have in storage?
- What is your associate attorney and/or legal assistant’s long-term career plan and how does your firm fit in?
- What is your best source of new clients? What data have you collected to substantiate this belief? How do you incorporate this valuable information into your marketing strategies?
- Which is your most cost-effective marketing strategy?
- How much does it cost to generate a new client from each of your marketing strategies?
- What do your clients really think of you? Have you asked them? When did you last ask?
- Before you renew your office lease, what are the building owner’s long-term plans for the building/your space?
This list could go on and on, but you get the picture. There is so much more to knowing your business than simply looking at the bottom line. You still may not know what all you don’t know, but you now have a starting point. Ask your mentors, take classes, attend CLEs on law practice management issues, read—you need to know these things. Study other service industries. Read business-related books. Learn, learn, and learn some more. The more you know about the “business” of the practice of law, the more efficient, productive, profitable and satisfying your practice will become. Fill in the gaps in your business knowledge and you’ll have a good shot at growing the practice of your dreams.
Make minding your own business your top priority!
What’s Working—What’s Not
To find out how your firm is doing and where you might need to do some work, please take a moment to answer the following questions:
- Do your expenses consume more than 45% of your revenues?
- Do you sometimes have trouble meeting monthly expenses?
- Have you had to borrow to meet basic operating expenses within the last year?
- Do you have less than six months’ worth of operating expenses (including your compensation) set aside for emergencies?
- Does it take longer than 60 days for you to be paid by your clients?
- Do your accounts receivable equal more than two months’ worth of revenues?
- Is your realization rate lower than 90%?
- Are you operating without a written business plan, budget, or marketing plan?
- Do you write off direct client expenses incurred in-house (e.g., postage, fax, photocopies, phones)?
- Are you without a plan to increase profitability over the next five years?
- When you set your fees, was your first consideration what your competition charges?
- Do you want to add staff or another attorney, upgrade your technology, or buy a building, but can’t afford to?
- Does it seem that you are working harder now than you were five years ago, but with less to show for it?
- Do you want to make more money?
Every “yes” is a red flag indicating that you’ve got some work to do. Put in the effort and your practice will reward you nicely.
Make minding your own business your top priority!
Did you find this information helpful? Would you like to learn more about profitably and efficiently managing your firm (including forms to help guide the process)? If so, click here to purchase the author’s book Minding Your Own Business. GP/Solo Division members automatically receive a discounted price.
Ann Guinn is a former law firm manager turned consultant who provides practical business advice to lawyers on the business side of running their practice. She can be reached at Anngp15@aol.com.
© Copyright 2011, American Bar Association.