(Read Part 1)
The Role Your Accounting SHOULD play in Your Legal Business
A great set of books should EMPOWER you! They should leave you feeling confident and like a crystal ball reader because you can get a pretty clear glimpse of the financial future.
Paint a picture and tattle tale on problem areas (like a financial toddler)
When you look at your financials you should quickly see the picture they paint of your legal business’s performance. Your financials should serve as a confirmation of your financial positioning, a tool in which to measure your goal progression, and a compass guiding you into your financial future. When we look at the example of I’m on Top of my Books P.C. (below), we are able to quickly calculate profitability per case type. If you know that your margin on no fault divorce cases is usually around 80%, this particular report would have thrown a flag to look into why the heck you were only at 59%. Here’s a hypothetical example of how this could play out. Let’s say you investigate this problem and come to find out, the reason your margins were so off is because you had two cases in this time frame which had unusual circumstances causing the client costs to be unusually high. You study the cases and determine that you need to break your no-fault divorce cases into two types with two different flat fees. Now you’ve set your fees up to accommodate these types of cases in the future and secure your profit margins.
If your books look like this:
You’re going to want to work on getting them to look like this:
If something is off, you should be able to tell and know exactly where to look in order figure out what happened and work to correct it. This makes your financials a valuable tool in making strategic business decisions. When you pay attention to your numbers, know where they should be each month, and understand why they can be different, you can adjust the sails of your legal business and fine tune your operations to maximize profitability.
Give you an idea of the possibilities
There are formulas just waiting to be discovered in your financials. These formulas can be used to forecast your potential financial future and provide a glimpse of what could be. In our example we pretended like we were a practice that already focuses on a niche (divorce cases). Most often we see at least 5-7 practice areas, some of which have nothing to do with one another. When you spread your focus over multiple practice areas, you have a broad array of potential situations that require different time and money investments. Imagine if you focused your time and resources towards a narrower offering and services that went hand in hand. Estate planning and business law is a good example. Business owners need this type of planning. You should understand this. You have a business which you started because you wanted a better financial future for yourself and your family. But what happens if one day the unthinkable happens. Does your Estate take care of your business and your family?
When you focus your efforts, you make it simpler for your legal business to establish standardized services, deliverables, and internal processes. You also provide more value to the clients you serve because your knowledge is specialized, not surface level broad. See how this works? All because your financials painted a picture of profitable practice areas vs. not so profitable practice areas and you, being the empowered legal business owner, made a strategic business decision to drop a couple practice areas and optimize what was left.
One more reason, in case the others weren’t enough
My husband and I went to see a lawyer a couple years ago (no, not a divorce lawyer and no we are not drug smugglers). I beat someone up over the last snickers bar in a grocery store when I was pregnant. Haha, joke! We’ll call this lawyer Tim. Tim had been practicing law for over 30 years and was well known in his area. We found him online, so clearly he was actively promoting his practice. His office was in historic downtown right across from the courthouse. Beautiful area full of architectural character and buzzing with traffic. As we walked through the door, I could smell the old building in all it’s glory. I have a thing for awesome old historical buildings and houses if you haven’t caught on yet. What I saw when I walked in reminded me of exactly why I do what I do. As we looked around the room we scanned over all the boxes. Boxes lined every single wall, many stacked to the ceiling. Directly in front of us was the lone secretary, also surrounded by paperwork. We met and talked with Tim and took care of what we needed to take care of. Overall Tim seemed very dis-enthused about the conversation, like he has 100 of them every day with no passion. As a client we catch these vibes folks. Once we were done, as we stood by the front door getting ready to leave, Tim started to head upstairs where I’m confident there were more boxes. I stopped him and asked, “So Tim, how many years have you been in this office?”. “20 years” he responded. Then I asked, “You must be getting ready to retire after 30 years then, huh?”. Tim took a breath and sighed saying, “Oh no, I’ll probably die in here”. My heart hurt for Tim.
Tim probably got into practicing law for the same reasons you did. He wanted more time with the people and things that mattered most, more money to support those people and things, and deep down he wanted to positively impact the lives of the clients he served. Somewhere along the line, legal business ownership took its toll on Tim, and he probably just didn’t know how to take control of the sails.
I want something different for you.
If you ever want to properly exit your legal practice for a profit, you’d better believe this stuff matters. Weather you groom another professional to take the practice over or sell it to someone, those people are going to care about your numbers and your accounting systems.
Why you REALLY started your own legal business
There’s a third reason why a lot of the lawyers go into practice for themselves. I didn’t mention it to you before now because so often lawyers lose it underneath the burden of running a legal business. You, my lawyer-friend wanted to make a difference in the lives of the people you serve. You care (even if your clients think you don’t). When your financial house is in order, you are free to do just that, impact your clients lives in a positive way. You can keep your passion and not get lost in running a legal business. You don’t have to be worn down until your passion for practicing law diminishes. You don’t have to end up like Tim, and numbers are one of the key tools you can use to achieve this.
When you know better, it’s your responsibility to do better.
Now, go do better legal warriors!
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®.