Okay, it’s actually four things you need. Because the first thing you need is a GOAL!
If you’re striving for a certain number of billable hours or a certain revenue number but don’t have a target profit margin, you need to get one. How will you know if you’re on track if you don’t have a finish line in sight?
I believe your goal should be no lower than a 25% profit margin. In fact, many of our clients are shooting for 35% or more! Sound ambitious? Here’s what you need to have in place to make a profit margin goal like this a possibility:
If you want to optimize your profitability, you need a budget. I know that some people think budget is a dirty word. It feels like you’re putting yourself on a financial diet and taking away all the freedom.
The truth is, budgeting gives you freedom.
When you have a budget in place, you know exactly how you want to spend your money and what you want to do to grow your firm. That means money doesn’t get wasted on all the urgent but unimportant things that pop up.
Your budget also shows you anytime you go off course. If your spending is starting to climb in one area, you’ll know in time to fix the problem or make an adjustment. If you don’t make those changes, problems will start eating into your profits.
KPIs and targets
We’ve talked about this one before. You need to identify the key performance indicators that drive your profits. Some great examples are new client conversions and productivity for your attorneys. You need to know what KPIs to track and what your targets are because growing your profits is the result of growing in each of these areas.
If you’re not sure what to track or how to get started, sit down with a law firm financial expert to map out a plan. We offer a Business Diagnostic Review to help our clients get started.
Efficient, real-time tracking of your numbers
In order for your budget or KPIs to be effective, you need an efficient, accessible way to track it all in real-time. In other words, your bookkeeping system needs to be kept up-to-date and needs to provide the level of detail you need to see.
The best way to do this is to work with an accountant who knows the industry. They can help you set up your chart of accounts to include everything you need and create custom reports that zoom in on your KPIs and most critical numbers. That way you can keep an eye on those numbers at any time with the click of a button. But don’t forget to sit down regularly with your accountant to dig into the numbers more deeply and strategize for the next period.
With your budget, your KPIs, and a system to track it all, you can reach those stretch goals and take your profit to the next level!