Key performance indicators (KPIs) are very popular in today’s business world, and because of this popularity it feels like there are hundreds of KPI metrics to choose from. The question for law firms becomes, “What are law firm KPIs and which do we prioritize to enhance profitability?”
Here are five financial law firm KPIs that require regular exploration and provide valuable insights for informed decision making about firms’ legal practices.
1. Importance of Billed Revenue
Checking invoices month after month for existing and new clients is essential. This KPI can help you predict an influx or decrease in cash flow. Depending on the firm and its practice areas, there may be a predictable ebb and flow to billable hours, but an unexpected change to realization rates might throw off budgeting and projections. If you can catch a change in billings early, it can help with planning for any potential challenges with cash flow.
2. Using the Average Collection Period Formula
Average Collection Period: The average days it takes to collect on accounts receivable.
This KPI provides an idea of the turnaround time it takes clients to pay. If invoices have terms of due net 30 and there is an average collection period of 60 days, there is potentially a collection problem that will need to be considered based on how uncollected bills are being communicated to clients and what policies need to be enacted to bring this number down. Remember, cash is king; if you are not receiving payments in a timely manner, this may result in cash flow problems down the line.
3. Leveraging Overhead Ratio
For law firms, overhead is typically all costs that are unrelated to the lawyers’ salaries including nonbillable time. It is the continual costs to operate business, excluding the direct costs associated with services. An easy way to measure overhead is to check the ratio on a regular basis.
This KPI can be a measurement of the firm’s utilization rate, or how effective it is at utilizing its resources.
4. Calculating Revenue per Lawyer
Revenue per Lawyer: The average revenue generated by each lawyer in the firm.
This is a financial KPI to watch over time to help determine the firm’s financial health and create a benchmark for reference. Major dips can be a red flag, but increases can indicate that it is time to begin onboarding someone to help with the additional work coming through the door.
5. Understanding Firm Debt
Debt can be a necessity for operating a firm, whether it comes in the form of credit cards, lines of credit, or a note payable. The debt-to-asset ratio is a strong indicator of the firm’s ability to pay its debt.
If the firm has more debt than assets, the ratio will be greater than one. In conclusion, the firm is essentially financed by debt rather than by the partners’ equity.
How Law Firms Can Utilize KPIs
These are only a few of the important KPIs out there that can be used to make informed data-driven decisions about a firm’s financial health. We recommend that these are explored along with financial statements and nonfinancial KPIs to help law firms set long- and short-term strategic goals that fit their mission and vision. Developing a dashboard of financial KPIs can be a great analytics tool for tracking and measuring a firm’s productivity.
If you have any questions or need assistance, please contact a professional at Forvis Mazars.