This is the next post in my series on building a million dollar law firm. My last
rant article focused on how attorneys often miscalculate their value. Successful attorneys understand that their value is determined by results obtained and client satisfaction. Unsuccessful lawyers, in contrast, feel that their value should be determined by the raw number of hours they put into a case, their level of education, certifications they have, etc. Taking the mindset of the former will help you to exponentially grow your referral base and to quickly improve the bottom line. In this post I’m going to focus on a big one in the legal profession – the fact that successful firms do a good job of managing their finances while unsuccessful firms do an even better job of mismanaging their finances. Doing things properly will leave you looking like this:
Unfortunately most firms will continue their raging success at financial mismanagement and the result will be those attorneys looking like this:
You can choose to look like the former or you can choose to look like the latter. It’s up to you. Let’s get to some specifics.
I regularly speak with law firms who are singularly focused on increasing profits by “getting more phone calls.” There’s a big problem with this mindset. That problem is the fact that growing revenue, while most of it just goes back out the door in waste, is about as effective as trying to get somewhere by riding a stationary exercise bike. First, most firms could immediately increase profits with the call volume they already have. They just need to clean up their financial practices. Second, cleaning up your financial practices and then focusing on revenue helps to ensure that you keep as much of your revenue as possible. This is called working smarter and not harder.
There are several areas where law firms mismanage their incoming cash. The first is that many, many, many (many) firms pay way too much in taxes. Many offices, for reasons beyond my understanding, don’t utilize the tax benefits of making an S-Corp election1. Those benefits are something I discussed in my article on how law firms can better organize their finances. This means that attorneys who focus solely on revenue are bringing in more cash just so they can turn around and make an extra donation to the government. One who wants to make more money, and hasn’t made an S-Corp election, can immediately increase their take home profits through that one simple change. A second area of mismanagement is in the area of employees. I’ve spoken with many lawyers who will openly admit to having one or more employees who aren’t very good at what they do and provide little value to the firm. Rather than getting rid of such employees these attorneys simply hire a second person to do the job that the first person is supposed to be performing. Feeling bad about firing someone results in the firm having extra payroll. The approach of not paying one person to perform work, by electing to have two at twice the cost, is bad for profits for obvious reasons. A third hallmark of firms which mismanage their finances is that they don’t perform their book keeping and review their financial performance on a regular basis. If you don’t regularly watch where your money is going then it’s going to just keep melting away in ways you can’t appreciate.
Unsuccessful firms also find ways to mismanage their money when they engage in efforts to “get more phone calls.” Rather than taking the time to determine the most cost-effective way of getting phone volume these firms just jump on the first idea they can find (usually pay-per-click, lead services, and things of the sort). Anyone who regularly reads this blog knows how I feel about that type of approach. The failure to invest in quality marketing assets, while spending large sums on something instant, is a hallmark of firms which are unsuccessful.
Million dollar law practices are good at managing their money. These are attorneys who ensure that they are keeping as much of their revenue as possible. This keeping of revenue is actually their primary focus and growing their client base only comes after they have their profit margins are in a good place. The result of this is that they don’t pay unnecessary taxes and they don’t have excess employees. In other words, these firms have higher profits with the same or even lower revenues than many other firms. Stop and think about it – the next time you walk into that big shiny office someone has, with many employees, it may be that there are attorneys with much smaller operations actually making the same amount of money at the end of the day (if you don’t believe me then try reading a great book called The Millionaire Next Door). Successful firms also understand the fact they need to invest in their own marketing assets and not rent ad space from third parties (see my article on why attorneys should avoid pay-per-click as an example). To put it simply, successful practices do as good a job at managing their finances as unsuccessful firms do at mismanaging their finances.
I’ve spoken with attorneys who I practiced against with offices which were similar sized operations to what I had. They were surprised to see that I grossed $1,046,695 in my fourth year of practice. The moral of the story – the successful offices aren’t the ones with the most employees or the largest number of cases. They’re the ones who are managing their finances correctly.
1 Nothing on this blog should be viewed as tax advice from SEO For Lawyers, LLC or from any of our writers. Neither our company nor our writers hold themselves out as tax professionals or financial advisers. For specifics tax issues impacting you or your legal practice it is suggested that you contact a licensed professional.