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July 15, 2011 Practice Points

Solo and Small Firm Economics

By Virginia Sierra

Understanding the economics of your firm will lead you on the path to financial success. When running a solo or small practice, it is easy to forget the business side of your law firm. However, as the controller of your firm it is imperative to consider these financial benchmarks.

Net income. The components are compensation, fringe-benefit costs, and retirement-plan contributions. These should equal 50–75 percent of your gross fees. The remainder of your fees should go to your firm's overhead expenses. If a firm's overhead expenses are nearer to 50 percent, it does not necessarily mean less income. An attorney with staff will have higher overhead expenses; however, the amount of work the staff can produce increases net income.

Gross fees. The recommendation is to set a flat or a fixed fee and require an advanced fee deposit. Keep a tight watch on all billable time and soft costs (such as copies, faxes, and long-distance calls). There is no way to guarantee payment of billable time; however, good service and client relationships help encourage them to pay.

Realization. Your gross income can only be counted when it is actually paid by the client. Therefore, the emphasis is back to advanced fee deposits and payment of billed time.

Trends. Create a budget. Your budget will create and a focus on finance and financial communication within the firm while setting a standard for performance. A budget will also force you to plan and track trends while motivating you when your firm is trending downward.

The factors above are critical to your firm's financial success. In addition, do not forget the qualitative factors of your practice that do not generate fees. Pro bono work, mentoring, and new business development activities are also highly important.

Focus on the economics of your firm and put on your hiking boots as you trek down the path to financial success.

Virginia Sierra is with Cohen, Kennedy, Dowd & Quigley in Phoenix, Arizona.

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