Small Law Firm Profitability

While lawyers and accountants both are charging for their time, accountants as a profession are perhaps more diligent in recording the time that they are spending on each matter. The subject of today”s blog will be the controversial one of recording time and look at two reasons why that can help you in your practice.

Over the last two blogs we have revealed the secret that:

The earnings of a partner in an average small accounting practice are around twice that of the earnings of an average small legal practice principal.

Rather than just accept this, I have tried to identify just why this is and in doing so, identify opportunities to improve ‘Small Law Firm Profitability’.

So far, we have talked about two reasons why  accountants are making on average around twice the income of  lawyers.

Just to recap.

1)    Accountants often have greater leverage in that they more fee earners per principal than small legal practices

2)    Accountants tend to be more proactive and communicate with their clients more frequently. They have an advantage as the client has to have an annual meeting anyway to get a tax return done, but many small practices are communicating more regularly than that.

So let’s now look at the next point we have identified.

Accountants tend to record all of their time

While there are small legal practices that record their time on all matters, an approach that appears to be quite widespread, is that time is only recorded on matters that will be billed based on hours spent.

For example, a conveyance in most cases I have seen will be billed as a fixed fee that has been negotiated with the client in advance.

A family law matter however, will often be billed on an hourly rate based on the time spent on the matter.

In contrast accountants tend to record all time for all matters, even ones where they are charging a fixed fee.

So let’s identify two ways that this can help you to improve profitability.

1)    Monitor Productivity

If all time is recorded, then you firstly can monitor the productivity of your fee earners. For example, you may set a target that employed fee earners, with no management responsibility need to record say 6 hours of chargeable time per day.

If you also record all non chargeable time and split it into meaningful categories, then you are able to develop strategies to free up your fee earners from non chargeable work and get them spending more time on chargeable work.

2)    Monitor the Hourly Rate Recovered

While it is good to get the time recorded in the first place, the ultimate driver of profitability will be how much of that time you are able to actually bill. You can have a charge rate of $1000 per hour, but if you are only able to bill $100 per hour of it, that is what you are recovering and that rate is what will drive your profitability.

By recording all time, you are able to see what work is the most profitable and develop strategies to generate more of it and conversely, see what is least profitable and over time replace it with more profitable work.

Implement these strategies to improve your small law firm profitability.