Now that we have discussed the financial red flags and the strategies to improve profitability of your law firm, all that is left is to progress. And to effectively do that, you need to implement key performance indicators, or KPIs in short, within your monthly reports and keep them in check.
KPIs in your monthly reports will let you track key metrics and assess your law firm’s position in the market. We discuss why KPIs are necessary for your law firm and some essential financial KPIs that you can use to improve your law firm in contrast to the competition.
My law firm is doing fine. Why should I bother with KPIs?
KPIs help you understand the overall health of your law firm and plan accordingly. The sole purpose of implementing KPIs within your reporting system is to stay on the right track of progress while being ahead of time with plans and initiatives that might help you avoid unforeseen problems.
In summary, KPIs can help you to:
- monitor your law firm’s performance. You can keep your law firm’s performance in check by analysing your performance against performance metrics and keeping up with current trends.
- hold your team accountable. Meeting target goals and projected results become easier when you implement KPIs within your system. It is the necessary push your team requires!
- eliminate the guessing game. With KPI analysis and data-driven works, your law firm has a better shot at being successful instead of just riding the waves.
How do I know what financial KPIs to work with?
There are hundreds of metrics that you can use as KPIs to monitor your law firm’s financial health. Steps to easily break down which metrics your law firm requires are as follows:
- Make a list of your objectives.
- Do a performance report for your law firm.
- Make a list of data you already have.
- List down financial KPIs you need.
- Carry out an analytical comparison.
- Keep it simple.
Key Performance Indicator #1
Metrics to monitor funding
Your law firm runs on the partner capital (equity) and bank loans (debts). To benchmark your funds and find out the best possible way of funding, you need the following KPIs:
- Total capital/ number of partners = Capital per equity partner
- Total bank loans/ number of partners = Bank loans per equity partner
- Total bank loans/ total capital = Debt per equity partner
Key Performance Indicator #2
Metrics to monitor cash flow
KPIs to measure your income are essential in maintaining a healthy cash flow within your law firm. It is easy to monitor your expenses, which are generally done monthly or quarterly, but keeping track of billables is a whole new story. With the following KPIs, you can keep track of your billable hours and keep the cash coming in consistently.
- (Work in Progress (Wip)/ Revenue for last 12 months) x 365 = Work in Progress (WiP) days
WiP days indicate how long it takes for your firm to generate fees. The lower the WiP days, the faster the fees are being generated.
- (Trade debtors/ Revenue for last 12 months) x 365 = Debtor days
Debtor days indicate how long it takes for your law firm’s clients to complete their payments. The lower the debtor days, the faster the clients are clearing up their payments.
- WiP days/ Debtor days = Clearance
Clearance indicates the start of a legal service that your law firm provides to a client till the day the client clears their due. If Clearance is high, it means the income is slow and the debt that your law firm owes is not being paid off.
Key Performance Indicator #3
Metrics to monitor profitability
Here are a few metrics that can help you to monitor and track your law firm’s profitability efficiently.
- Income per earners = Income/ earners
- Total salary costs = Salary/ Income
- Profit per employee = Profit/ number of employees
- Overhead rate = (Overhead expenses/ earner costs) x 100%
Overhead rate is a calculation of the external costs you bear for the services your law firm provides. A lower rate equals greater profitability.
Conclusion
Key Performance Indicators are a good measure for your law firm. The proper implementation of KPIs is mandatory to keep a law firm running. Competence within the legal business depends on your law firm’s application of KPIs and functioning accordingly.
A favorable practice within your law firm is to hire an expert legal bookkeeper to keep track of your KPIs along with your monthly and quarterly reports. With the help of automated legal practice management softwares like Leap and QuickBooks Online, they can take care of your burden error-free.
