Yesterday during a live Strategy Session, we were laser-focused on legal marketing, reviewing a member’s website. Up popped a photo of the Tampa Convention Center. Anxiety flushed my veins and I totally lost focus.
What the heck happened?
After all, the convention center is on the water, Tampa is lovely, many fantastic groups gather there…but that’s exactly it. One of the groups that gathers there is hundreds of anxious wanna be Florida licensed lawyers. Yes, the Tampa Convention Center is a site for the bar exam, which I endured (successfully) years ago.
Oddly painful to have that visceral reaction so many years later. While some lawyers are math geniuses, most of us don’t share that reputation. In fact, when we jump into law firm financial analysis, some of us get that lawyer vein anxiety thing which shuts down the noggin. To avoid feeling uncomfortable, we make decisions based on guesses, not facts – and as you might imagine, that doesn’t get the results any of us want.
Law Firm Financial Analysis Made Easy
That’s NOT what’s going to happen today. Law firm financial analysis does not need to be hard – and it’s necessary. When you know your numbers and can do the math, law firm decision making transforms from being a guessing game to being strategic decision making. Strong decisions propel you forward toward your goal of creating the law firm – and life – you want.
Today, we’ll walk through how to determine your:
- PNC Show-Up Rate Formula
- PNC Conversion Rate Formula
- Law Firm Profit Margin Formula
- Client Profit Formula
1. PNC Show-Up Rate Formula
A PNC is a “potential new client.” You need to know how well you’re getting butts in seats for a consult so you have maximum opportunity to close deals (and help clients). I suggest you track this number monthly and annually. After just a few months, you’ll see a pattern and can make any adjustments from there.
To determine your PNC show-up rate, use this formula:
PNC Show-Up Rate = # of PNCs Who Show Up ÷ # of Appointments Booked x 100%
First, # of PNCs Who Show Up ÷ # of Appointments Booked
Second, x 100%
= PNC Show-Up Rate
- 130 PNCs show up ÷ 150 PNCs who scheduled x 100% = 86% PNC Show-Up Rate
- 168 PNCs show up ÷ 182 PNCs who scheduled x 100% = 92% PNC Show-Up Rate
2. PNC Conversion Rate Formula:
Okay, so we’ve got the PNC Show-Up Formula, now we turn to how many of those PNCs who show up are converted to paying clients. Here’s how to determine your PNC Conversion Rate Formula:
PNC Conversion Rate Formula = # New Engagements ÷ # Consults
- 100 new clients ÷ 200 consults
= 50% Conversion Rate
- 345 new clients ÷ 400 consults
= 86% Conversion Rate
3. Law Firm Profit Margin Formula
Next, to determine your profit margin:
Firm Expenses ÷ Revenue = X. Then, 1 – X x 100% = Law Firm Profit Margin.
First, Expenses ÷ Revenue = X
Then, second, 1- X
Third, x 100%
= Law Firm Profit Margin
- First, $500,000 expenses ÷ $1,000,000 revenue = .5
Second, 1 – .5 = .5Third, x 100%= 50% profit margin
- First, $100,000 expenses ÷ $175,000 revenue = .57
Second, .57 subtracted from 1 = .43Third, x 100%= 43% profit margin
4. The Client Profit Formula
You also need to know how many clients you need to convert to meet your profit goal, so let’s walk through this.
$$ Profit Desired x 4 (sample profit margin of 25%) = Annual Revenue Required ÷ Average Matter $$ ÷ # Weeks with Consults Scheduled = # Clients You Need Each Working Week
First, $$ Profit Desired x 4 (sample profit margin of 25%; you enter your own profit margin from the above analysis. I got 4 by dividing 100% by 25%)
Second, Annual Revenue Required ÷ Average Matter Fee
Third, ÷ # Weeks with Consults Scheduled
= # Clients You Need Each Working Week
- Million Dollar Law Firm Example:
$250,000 x 4 = $1,000,000 ÷ $5,000 ÷ 50 = 4 clients/week$250,000 (profit desired) x 4 (25% profit margin) = $1,000,000 (total law firm revenue) ÷ $5,000 (average fee) ÷ 50 (weeks) = 4 clients a week for 50 weeks
- $500,000 Law Firm Example:
$125,000 x 4 = $500,000 ÷ $10,000 ÷ 46 = 1 client/week (+ 1 additional client every quarter)$125,000 (profit desired) x 4 (25% profit margin) = $500,000 (total law firm revenue) ÷ $10,000 (average fee) ÷ 46 (weeks) = 1 client a week for 46 weeks (+ 1 additional client every quarter)
- $250,000 Law Firm Example: $62,500 x 4 = $250,000 ÷ $5,000 ÷ 46 = 2/week$62,500 (profit desired) x 4 (25% profit margin) = $250,000 (total law firm revenue) ÷ $5,000 (average fee) ÷ 46 (weeks) = 2 clients a week for 46 weeks (+ 1 additional client every quarter)
Empowered Decision Making through Formula Financial Analysis
Many lawyers label lack of consistent cash flow as a problem. It’s not. Lack of consistent cash flow is a symptom of a problem. Using the above formulas and others like them, you can better pinpoint what needs to be changed.
For example, if you ran the PNC Show-Up Formula and you don’t like the results, then look to your system for bringing in PNCs. Here are questions to ask yourself: how is your receptionist’s appearance and manner, are directions provided, did you send a “shock and awe” welcome kit, are reminder calls/texts/emails being made, and are you requiring a credit card to hold the meeting?
Or, if you’re not converting PNCs to clients at a rate you feel is appropriate, then look to the impression your office and team make as well as your closing skills (which include listening, empathy, conveying individualized value, quoting fees, NOT giving away legal advice before you’re hired, having the engagement agreement executed and retainer paid right then and there, etc.).
Observe how making decisions through formula financial analysis works for you over time. Once you play around with it a bit, these formulas will actually reduce your anxiety while increasing your feelings of empowerment and control by acting as a guide to what’s really happening – and what to do about it. You have the power to tweak your systems and policies to get the results you want – including consistent cash flow, higher fees, and more time off – by making strong decisions guided by formulas.
All opinions, advice, and experiences of guest bloggers/columnists are those of the author and do not necessarily reflect the opinions, practices or experiences of Solo Practice University®.