Lawyers can make a profit and save money by tracking numbers. It is more than just entering data into accounting software. Measuring certain things in your practice can determine if things are growing, and key performance indicators (KPIs) can show which areas of the law practice may need work. Below, you will find out How a Bookkeeper Can Help A Law Firm’s Profit Margin.

The Health of a Law Practice – 3 Important Items

In the health of law practice, it is important to have a great system and software in place when tracking the following 3 items. Lawyers are busy and don’t have the time to make sense of the results and need to spend their time practicing law, not calculating numbers and drawing assumptions based on data. Consider outsourcing all unrelated law tasks or to avoid seeing a large decrease in profits.

1. Referral Sources: First, you will need to track where new clients originated from. Looking at how they found the law office, for example, is it via a Facebook ad, a billboard,  a referral? Finding out each source, the lawyer can improve and focus its advertising with ease, eliminating those tools that aren’t working.

2. Profitability: Second, the profitability of each situation. Good lawyers know how much they are charging but also how much profit they will make. After expenses are paid, what is left over will be the profit. You will want to have some sort of tracking system for this.

3. Realizations Rates: Third, the realization rate is tracking the money the lawyer collects from clients. Regrettably, there are times the lawyer gets paid, say 15 hours when invoicing for 20 hours. You need to consider this when reviewing your work. Realistically, we would expect the full amount due would be paid each time, but that would only be in a perfect world.


Making Sense of the Numbers

Hiring a bookkeeper is a great way to make sense of the various numbers these software programs produce. The bookkeeper will do the clarifying and number collecting. Consider this, if it gets measured, it will get the appropriate attention.

Lawyers are busy, busy people. They are generally busy with reading, studying, and working on cases. Comparing a lawyer’s revenue with other similar lawyers is a great way to measure whether a lawyer is good at his/her job. A lawyer needs to ensure he/she is maximizing time and money in their practice as well as their clients’, to maximize profit and keeping clients satisfied. Hiring an office manager, a secretary, and a bookkeeper proves to be highly beneficial to the growth of a business. Having someone in these positions will provide time for the lawyer to focus on the higher-level work that needs to be completed.

For practices that make less that take in one million dollars annually, it is a huge benefit to hiring a contract bookkeeper. He or she will have the ability to answer questions and find financial information quickly. Many small law practices don’t have the need for a full-time, on-site bookkeeper. Neither do they need to hire a CPA to do their weekly and monthly financial tracking?

Two vital pieces to the law office practice are hiring a great bookkeeper and tracking Key Performance Indicators (KPIs). These two key factors fit together as a bookkeeper can do the work of measuring KPIs.


The Income Statement, Balance Sheet, and Statement of Cash Flows

A great bookkeeper creates three special reports each month, based on the financial activity that flows through the law office. She (or he) specializes in law bookkeeping in order to sharpen her knowledge of the special bookkeeping needs this area requires. The reports will be used to discuss with the lawyer the actual health of his practice.

Bookkeeping has developed to be more than just entering data into accounting software. A great bookkeeper will take the reports the software helped produce, and turn them into real, KPI tracking, result-producing tools. The numbers can be reviewed by the lawyer and bookkeeper as to what they mean, and how to make them fit the practice the following month.

The Income Statement

The Income Statement tells how much money was earned during a specific time period. This useful information will let you see the profit from the marketing and billing that was done over that same period. If the lawyer advertised on a highway billboard in March and made a higher profit than a month over February’s profit, it can be determined that the billboard was a success. If there were a lot of expenses in the month of July, the lawyer can conclude that cost per matter is too high, and areas need to be review for cutbacks.

The Balance Sheet

The Balance Sheet tells the practice exactly what it owns, how much it owes, and how much equity it has at any specific time. Having a good lawyer (or even better, let the bookkeeper) compare the numbers, which can change from month to month, to determine how well the business is doing overtime. A lot of unpaid invoices to vendors show the lawyer that equity needs to be converted into paying debts. A lot of property/assets show that cutbacks on purchases may need to be done for a few months. When there is a lot of equity, it shows that the practice is successful, and should continue doing what it’s doing.

The Statement of Cash Flows

The Statement of Cash Flows helps the lawyer see what money went into the practice that month and where the money went – to investments, salary, and bills? You can determine if spending is high in particular areas – spending too much on rent or certain expenses. This is a useful report and will really give a lawyer the information needed to track KPIs properly.

The bookkeeper uses these reports each month to help measure the health of the law practice, then has a discussion with the lawyer to inform them of the results. A lawyer needs to know the health “score” of their business just like a student in school needs to know their test scores. Partner with a great bookkeeper now to get your KPIs in place, and see outstanding profits next year! What did you think of How a Bookkeeper Can Help A Law Firm’s Profit Margin? 

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Looking for more bookkeeping information or tips? Check out our post on 5 Common Bookkeeping Pitfalls – and How to Avoid Them