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With the fourth quarter of their fiscal year upon them, most law firms are now digging into the planning process for the coming year. Sifting through numerous financial reports is, of course, a key part of the process for law firm leaders. But with so many numbers involved, where do you begin?
Many law firm leaders say financial management is among their greatest challenges, in part because most lawyers are by nature “word people.” After all, if you naturally gravitated to numbers, you would have chosen a career in commerce or accounting rather than the law. Yet now, as managing partner, you find yourself running a sizable business, so getting your head around the numbers is critical—both to your success as a leader and the success of your firm.
The accounting systems used in most firms do a good job providing an abundance of data. The issue is typically how to interpret all the financial data available to you. To start, it is helpful to understand the basic questions that will affect your planning and then look at your financial information to see how it answers those questions. The following sets out a few of the more important questions and where to look in your financial reports to get the answers.
Is Your Business Growing?
Growth in a firm’s activity can be measured in a number of ways. Here are examples of the measures that are relevant and understandable to the lawyers working in the firm:
Are You Leveraging the Firm’s Talent?
In addition to rates, another profitability factor that is directly related to talent is leverage. The leverage model that will be most profitable is usually guided by the nature of your practice, and given practices may leverage a mix of associates, paralegals, staff and technology. But overall, leverage is key to profitability in any law firm. There are a number of basic indicators that you might monitor to gauge where adjustments may be needed, including these:
How Are You Managing the Business?
Even if your firm has a full-time administrator, chief financial officer or controller to run the day-to-day business side of things, you still need to steer the helm. Keep your eye on the following, and then use your influence as a leader to set the direction and align your partners behind the firm’s goals:
Regardless what the type of practice or the leverage model is, overhead per lawyer is an equalizer in the firm. It is a measure of how well you are managing expenses to match the firm’s financial plan.
How Do You Communicate the Numbers to Your Colleagues?
Many partners say they receive regular financial information but often they don’t take the time to read it—or, when they do, they don’t understand what it means. Spreadsheets might be the reason your accounting people get up in the morning, but they can leave your attorneys very cold.A solution: Communicate as much as you can on a one-to-two page summary and where possible use graphics to convey key figures in visual form. A picture truly is worth 1,000 words and can show trends that give rise to meaningful conversations between individual stakeholders and at your partnership meetings. With the most important numbers demystified, you can celebrate what the firm is accomplishing. You can also understand the challenges and work collaboratively to help your colleagues better understand the numbers and what they specifically need to do to improve the financial situation for the firm—and for their own pockets.
Karen MacKay is President of the consultancy Phoenix Legal Inc., focusing her work on leadership and strategy execution for law firms.