If you’ve been around me for very long, you know how much I love profit! If you’re not making a profit, you’re not running a viable law firm and you won’t last very long.
In the simplest terms, profit is the difference between your revenue and your expenses, so you always want that number to be a positive one. And as you improve the efficiency and productivity of your firm, you’ll watch the number grow so you can build your firm and build your future.
Within the KPI framework, we track eleven different KPIs for profit (told you it was my favorite). The simplest one, which we’ll talk about today, is your profit ratio.
The KPI: Profit Ratio
Profit ratio (or profit margin ratio) gives you a glimpse of your profit as a percentage of revenue. This allows you to compare your firm to industry benchmarks, as well as compare your own numbers over time, because it isn’t tied directly to a certain revenue level.
How to track it
Profit ratio is measured by taking your net income and dividing it by your total revenue. If you’re looking at your P&L, your total revenue is at the top and your net income is the bottom line.
This calculation shows you what percentage of your revenue is profit, i.e. how many cents of each dollar are left after you cover your costs.
Why it matters
Your profit ratio shows you how much of your billing makes it through the gauntlet of expenses and actually reaches your bottom line. If you find that your profit ratio is too low, simply pushing for more revenue may not be the answer. It’s like rushing to fill a bucket that has a hole in the bottom. Luckily, there’s plenty we can do to improve profitability and get that ratio back up to where it belongs.
With our clients, we like to see the profit ratio at least 25%. So, in terms of benchmarks, this is a great starting point and you can compare your own ratio over time to see how you improve.
Of course, just like revenue without a good profit margin isn’t helpful, neither is profit without revenue. If you make a 50 percent profit margin, that’s great. But if you only earned $1 in revenue, then you’ve only got $0.50 of profits. Not exactly a fortune. You need both revenue and profits working together.
Within the profit and productivity category, we also like to track Revenue Per Attorney. Consider that a bonus KPI for this week. Revenue Per Attorney is a great way to measure how productive each attorney is in your firm and it’s also a great way to keep track for bonus purposes. With your profit ratio in good shape, you’ll want every attorney on your team bringing in that profitable revenue.
Need a hand tracking or improving your profitability so you can grow your firm? We’d love to help. Click here to schedule a time to chat.