Episode 24 -
Six Key Numbers to Boost Your Law Firm's Profit

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Immigration Nation Podcast
Six Key Numbers to Boost Your Law Firm's Profit
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Are you tracking the right numbers to ensure your law firm’s success? In this episode of the Immigration Nation Podcast, Brooke Lively shares the six key numbers that can significantly boost your firm’s profits. Don’t miss out on these invaluable insights!

Transcript:

Hello, this is Scott Berry, and we have a very special guest for you today. This session is going to be for our immigration and family law firms. This is a very powerful discussion, one that everyone needs to hear about. I’ve got a book for you. I’ve got a guest for you. Welcome, Brooke Lively.  

 

Thank you so much, Scott. I appreciate it.  

 

You’re very welcome, and thank you. We were lucky because you’re based out of Fort Worth, and so you were able to drive in to be in person. And we really appreciate that because I think it’s such a great conversation.  

 

It is. It’s nice when you have that ability to kind of interact. Yeah.  

 

You guys are going to consume this so well. So let me tell you the story, how this got started. So I love to read. I read everything about law firm marketing, about growing your law firm, about law firm operations, and so I found this book and I thought it was worth giving a try. So I bought it and I started to just devour it. It was so good. It surprised. But I mean, I tore these pages up. I’m writing, underline, circling… I literally rectangle, circling, underline, wrote in the side, and highlighted. And it was so incredible. And it didn’t occur to me until well, later that Brooke was actually the author. And so when I put two and two together, I reached out on LinkedIn to ask if you would come talk about it and I appreciate — your book is amazing.  

 

Well, thank you. Attorneys are bright individuals. They’re smart and they’re so capable and they go to law school and they’re taught the law and hopefully they’re taught how to practice law. That kind of depends on where you go to school. But they’re not taught how to run a business. And so they get out into the real world and a huge number of them open their own firms and they’re kind of lost and they struggle with that. And I hate that. And that’s why I wrote the book.  

 

So the book is called From Panic to Profit and would you set up the premise for the book?  

 

Well, let me tell you a little bit about me, and I think that will help with the premise of the book.  

 

Perfect.  

 

I ended up running my family’s law firm. Weird story how I ended up there, but I did. My father like to shed his partners every 7 to 10 years. He had shed his partners, started a new law firm. We spun that up to seven figures in under 18 months, and then we hired someone similar to you to help us in sales and marketing who only works with law firms. And his clients came to me and said, “Can you do for us what you do for your family?” And that was when I realized that attorneys weren’t running their firms based on the numbers and based on data that, that was something that they weren’t taught, they weren’t familiar with could be kind of intimidating.  

 

Sure.  

 

And so I started a fractional CFO company and this book came out of that. These are the six foundational numbers that we think every law firm should be able to look at. Every attorney should know to feel secure and kind of have your arms around what’s happening in your firm. So one of the things that it says in your book is that understanding these key numbers can change your life if you own a law firm. Well, first of all, understanding these six numbers lets you sleep because it chases away that stress and that worry and that nagging feeling. That I’m missing something and there’s unknown. And so often what you imagine being wrong with your firm is so much worse than what’s actually wrong. Look at the numbers. It’s almost always going to make you feel better than what you think it is. Yeah, we learned early on that especially, law firms of maybe around 1 million who just hit seven figures were having to evolve their financial systems and the way they view the business to understand cash flow and things that they didn’t have to worry about when they were solopreneurs. And it was kind of difficult to pull together and show them how to create a dashboard and what they should measure and stuff. And you essentially do the hard work for them.  

 

Yeah, And you know, it’s interesting. I’m in EO Entrepreneurs’ Organization and they have this great chart. I love this chart and it talks about growth and it says you grow to $1,000,000, then you plateau a little bit and then you go through what they call the valley of death, and till you get to 5 million. And growing from 2 to 5 million isn’t a hard growth to grow your top line revenue? It is very hard on your bottom line profit and if you’re not really looking at your numbers, it can be incredibly stressful to do. Because you’re operational. All your operations side has got to be resilient. It all has to be rebuilt because what got you here won’t get you there.  

 

Exactly. And you’re looking at, I think, different margins as the owner because you’ve got solo margins and once you start scaling. You’re not the one doing all the work anymore. So we’re talking about six key numbers. Now, do they go in order or do they not?  

 

There is an order. They kind of build on each other. And really, I have picked out what I think are the six key numbers. But what we started with are kind of the six categories that we need to be monitoring. And the first category is cash. Cash is king. That’s what—everybody hears that even if they don’t understand it. It’s the oxygen for your business. If you don’t have any cash, your business is going to die. It’s really that simple. And there are different numbers that you can look at that will help you understand your cash. Your cash balance is one of them. You work with so many immigration firms who have all those lovely payment plan. But how much have you basically let your clients. Because that’s what it is. It’s a 0% interest with no collateral. And the other big number to look out in cash is your monthly nut. What does it cost for you just to exist for the month? So it’s your rent, your phones, your people, your marketing. It’s what you spend on average in a month.  

 

Got it.  

 

But the really important number of all of that is your cash flow forecast. And you need all of those components to figure out your cash flow forecast. Because what I want to know is how much cash you’re going to have at the end of the week, every week for the next 6 to 8, maybe even 12 weeks, because you know as well as I do, the weeks are not created equal. That’s right. And it would be so lovely if our clients paid us, one quarter of them paid us in week one and one quarter paid in week two and one quarter paid in week three, they don’t. It would also be really nice if our expenses were one quarter in week one and one quarter in week two, but they’re not. Week one and three are horrendous. Week one is always the worst week of the month because you have payroll and rent. Week three is also bad because it has payroll. Those are generally your two biggest expenses during the month. When do clients like to pay?  

 

Well, if you’re a family law firm, they like to pay week four, right before they think it’s the deadline. Yeah, the 30 days. So you’ve got to know if you have enough cash to make it through the week. So for all those solopreneurs that we meet that want to go to seven figures. So this is for them and their people because they’re going to have people manage their finances. They’re not going to be able to do it all at seven figures. They’re not going to be able to do it all at seven figures. But this is something to start when you are the solopreneur because you understand it. It really helps you get in touch with the financial rhythm of your firm. We’re going to talk about production next. All right. Production it is. So production is—I mean, guys, we get paid for moving work through our firm. We are selling legal services. So when we are looking at production, there are some numbers that go into that. The capacity, how much work can the firm do. if you’re a solopreneur? There are only so many hours in a week that you can work. We’re limited. We’re selling brain time. Your people are like a factory. There’s only so much work that we can move through. The second number is utilization. We have three attorneys. They can bill 30 hours each a week. That’s 90 hours. That’s our inventory. That’s our capacity. So what’s our utilization and then what are our billing goals? What are our expectations? Everybody should have a number and we should be holding them accountable every week. So when we have those three pieces in place, what we really want to know, the number that we want to track in production is work in progress. Got it. How much do we have unbilled that we’re going to bill at the end of the month? And do you know why Black Friday is called Black Friday? I used to know that and I actually got up. But there was a myth in retail that you would be in the red all year long. And then on Black Friday was the day that got the retail people into black, from red into black. That it’s the day that retail stores traditionally became profitable. Which is well into the year. It is well into the year, from a financial standpoint. But let me tell you, your law firm has a Black Friday every single month, and it may not be on a Friday. It could be on a Tuesday or Wednesday. But there is a moment when you have enough in WIP, when you have enough in work in progress, that you have covered your monthly nut and everything from that point forward, you know is profit. It’s gravy, and there is nothing better than sitting there and going, I’m going to bill and my team is going to bill for six more days and it’s all going in my pocket. So you want to watch that WIP number? Are you billing enough? Are you on track to billing your nut? It’s going to get a little trickier as you scale. Because then you’re adding people. And so if you’re not monitoring that early on, you’re going to have a real hard time monitoring it. As you grow and scale because you’re adding paralegals, you’re adding maybe VAs, maybe a receptionist, maybe another attorney, before you know it, you’ve lost control. That’s right, and it goes back to everybody needs a number. Everybody needs some kind of billing or production goal. And it’s not always ours. So family law, so easy to do ours. Immigration, it may be filings. Because we know that every time we do a filing, we get to bring X amount of money out of trust and put it in cash, and put it in our operating account. Let’s talk about one that’s near and dear to your heart, marketing and sales. Please do. You’re going to autograph that section for me when this is over too. I am. Because I got to tell you, I was shocked that you were telling people the exact same thing that we were telling people. Yeah.  

 

And I’m like, I just haven’t seen that before, and especially from finance people that you had a grasp for the exact same ratios and tracking things. I mean, for example, this is one of my favorite ones. We find reasons why people don’t hit their numbers. And one of the big ones is you never had a chance because you didn’t even know how many leads that you needed in order to hit that million mark, you never knew. So the whole time you were operating blind and you literally pointed that out in the book, is we start with revenue, average case value, you got to have this many leads. And so, yeah, talk about that because it was great section.  

 

So yeah, and I will put in a plug for the difference between a controller and a CFO. A controller looks at the numbers and they tell you what’s happened. They make sure that everything’s buttoned up, that everything’s accurate. A CFO is much more interdisciplinary. They understand how the operations fit together and how that all impacts the financial and how the financial impacts the operations. So yeah, I’m going to give you operational information based on the financials to impact your marketing. So that’s why it looks the way it looks from me, from the CFO. It’s much more strategic. So when we’re talking about marketing and sales here. There are a few things that you’ve got to look at. You want to look at your conversion cycle. And you know this. How many leads come in? Of those leads, what percentage are qualified, what percentage of qualified make an appointment for a sales call? So what percentage are showing up and then what percentage are converting in the room? And you need to know all of it, the whole cycle along because those rates mean different things, they’re different problems. Our team built an Excel spreadsheet that allows people to follow this every month and put in how many leads and how many booked a console, how many actually showed up. And out of those that showed up, how many were a fit and out of those that were a fit, how many did we win? And we try to bring them to that to focus on that because there’s best in class ratios for each one of those spots in the intake funnel as, well we call it. And so if you drop below best in class, the difference between being best in class, we found out and being average for a law firm is $100,000-$200,000, depending on how big you are. It’s hundreds of thousands of dollars that you’re just wasting, because you don’t have a good intake system. You want to know what I tell clients they’re doing in cases like that? They are lighting $100 bills on fire and throwing them out the window. You want to be able to monitor your conversion cycle or your intake funnel. I think you should also look at that by referral source. Because you got to know what’s working and what’s not working. But the number that you really want is the sales call booked. So when we’re talking about the six key numbers, you want the sales call booked and here’s why. You’ve got a 50% conversion rate and each new client bills $5,000 in the first month or bills on average, $5,000 a month for the first six months, whatever. That means that if you’ve got ten sales calls this month, you’re going to get five new clients and each one of those clients is going to bill $5,000. That’s $25,000 in revenue that you’ve just generated. And so it kind of builds and goes back. So you see it on your cash flow. So those numbers kind of build on themselves. These are all forward looking and what we’re doing, we need cash. When you’re out of cash, you’re out of options. If we can look earlier in the cycle, if we can look before we bill and collect what we are going to bill and collect in a few weeks. If we can back that up to potential new clients that are coming in, now we’re looking two months down the road creating options. I can see a cash crunch in March. That’s not going to happen until May and when I can see a cash crunch coming that far ahead, I can do something about it. Yeah, I can move bills, I can get a loan, I can terminate someone. Use your line of credit, you have options. There are options. So that’s why we want those leading numbers. So after sales and marketing, what’s the ratio? Well, actually, we want to go look at case management, and you alluded to this a minute ago. So we want to understand your cases. We want to understand your matters. We want to know the average price. We want to know the average length, and we want to know the average amount of pressure they put on your firm. So average staffing. So that was what I was saying. If it generates $5,000 a month for the first six months. And what we want to look at here is net new cases. So if we’ve got ten sales calls booked, we’re going to bring on five new cases. How many cases are we closing? Not closing, as in signing up new cases, but literally how many cases are we finishing? So this goes back to that capacity. Do we have enough capacity? Is the firm growing or shrinking? And we don’t want to wait until we’re all the way down looking at our revenue at the end of the year But if I can see that our caseload is getting smaller. Then we know that we’re going to need to make some changes somewhere. But same logic. If I see the case number growing then I know that I’m going to need to hire, that I might need more office space, that the infrastructure may not be enough. So we want to look at the net new cases. And as a attorney that owns your own operations and trying to be a little more strategic, a little bit more like a CEO, this is the kind of vision that you need to your financials that most people don’t have. They don’t need to be fair. All right, Brooke. So let’s talk about what’s the next number? The next number is budget versus actual. So we have been looking at all these theoretical numbers, we’ve been looking forward. Now it’s time to stop and say, did we get it right? So to get your budget versus actual, which is a report, it comes out of QuickBooks. It’s standard. It’s pretty easy. We need a couple of things. We need to know what your profit plan is. Oh, by the way, we don’t use the B word. Which B word? No budgets. Nobody wants a budget. Look, we’re entrepreneurs. We’re all about the possibility, not the prohibition. So you call it a plan? We call it a profit plan. How much money do I get to spend to make more money? We’re going to take our expenses. We’re going to build this profit plan. We’re going to put it into QuickBooks, and then we’re going to run it every month and see, did we plan right? Or are we getting good at this? Or are we finally figuring out what we what we’re doing? Are we learning how to really understand the firm and get it right? It is our time to come back and really assess how we’re doing and if we’re doing what we want to be doing. Okay. What is the sixth? The sixth number is owner compensation. Dear to people’s hearts. It is. And it is, at the end of the day it’s the most important number. Yeah. Because if the owner is not getting paid, there is no reason to do this. So the category is the ideal ratios. And I believe in running a law firm on the rule of thirds. I love that. I remember that in the section. Yeah. It made so much sense to me, share that. So one third of revenue goes to pay the people doing the work. One third of revenue goes to overhead expenses and one third of revenue goes to profit. And it’s really that easy. And if you can’t get those margins, then your life is going to be pretty great. Now they get out of whack. If they get out of whack, it’s difficult. So Scott got to tell you, marketing, it’s part of your overhead expenses. I suggest you don’t spend more than 10% of revenue on marketing, which would be one third of that one third of overhead. There are some things that are easy to fix. If you are overspending on your overhead, we can usually fix that pretty easily. If you are overspending on your people, that’s a little harder to fix. We have seen so many firms that come to us spending 40, 50, 60, 70% of revenue on people, and they just have these horrid compensation plans. I’m sorry, but you may not have a revenue, a 50-50 revenue split with your attorney. It’s not going to work. You’re never going to make any money. And the person that is being impacted by that is you as the owner. Because overhead’s going to get paid no matter what. The only place that will give is your pocketbook. It’s the profit. One of the things that we do with our clients is we make sure they understand what of their profit is being reinvested back in the firm so they can see that. I love that. How do you do it. How do you show them that? We divided out on their PNL so that they can see that, so that they can see the ROI, the return on investment. Because otherwise they just feel poor. I’ve heard that. I’ve literal heard people, they reinvest to grow and they’re growing and the revenue is increasing and they’re like, I feel like I’m making less money. Yeah. Mike Michalowicz calls it entrepreneurial poverty. It’s a good name for it. But if you got the right reports and if someone can break it out for you, I really love that. I think that’s a great idea. But you have to evolve as someone who knows what to look for and finance. Your finance team needs to know how to present this information to you, which is why I love the tips and suggestions that are in your books because they don’t know what they don’t know. As a fractional CFO company, we can’t help everybody. Our ideal client really is coming in generally at that $2 million to $50 million. That’s the size of the firms that we work with. But I talked to so many firms that are smaller that I want to help. Yeah they need the help. I got some of the same issues. Yeah. So that’s why I wrote this book. It’s to help them understand those numbers, to help them grow. But these principles, if followed, I think would be very powerful for a law firm founder. They are. And they set you up for success and they put you on the path. The numbers get more complicated as you go down the path. Cash is pretty easy to figure out. Really understanding your matters, your cases, that that takes them some number crunching to really understand how the cash flows over the lifecycle of a case. So what if someone takes our advice, they get the book, they love it like I love it, but they have questions and maybe some. Maybe they’d like to talk to you. Is it possible that they could reach out to you and talk about that? What can you do for them if someone reads a book and has questions? So I think the easiest thing is my website. Just go to cathcap.com, and you can send a message from there. You can book a call from there if you want to talk to one of us guys. This is Brooke Lively. She wrote the book, From Panic to Profits. And it’s amazing. These six numbers that she recommends will change your life. Thank you, Brooke. Thanks, Scott.