Knowing your numbers gives you great power to make smart business decisions. It’s one of the ways you breakthrough to BIG SUCCESS! In my experience, only 5% of solo and small firm attorneys know their profit margin. Do you?
To determine your profit margin, use this formula:
Firm Expenses ÷ Revenue = X. Then, (1 – X) x 100% = Law Firm Profit Margin
Broken down into steps:
First, Expenses ÷ Revenue = X
Then, second, 1- X = Y
Third, Y x 100% = Law Firm Profit Margin
First, $500,000 expenses ÷ $1,000,000 revenue = .5
Second, 1 – .5 = .5
Third, .5 x 100% = 50% profit margin
First, $100,000 expenses ÷ $400,000 revenue = .25
Second, 1 – .25 = .75
Third, .75 x 100% = 75% profit margin
Revenue is sexy, but profit pays the bills.
WARNING: For those of you not yet taking an appropriate W2 salary, you must count a salary equivalent to your contributions as a lawyer and manager as overhead for your profit margin to be accurate.
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