Law firm KPIs: Break-even Costs
The cost of running your firm is an important metric to track when you are starting a law practice. Knowing your cost of operations will allow you to decide where to focus your efforts and what you need to do to break even. As an attorney, do you know the cost of running your firm and breaking even?
To analyze this KPI, you need to look at your source of revenue and estimate your expected annual income. Examine the various practice areas you have at your firm and the fees you plan to charge a client to engage with your firm.
When determining the revenue side, we look at this in segments. First, will you track it by what services you will provide? Look at them by practice area. You can look at past records to determine what you think you might have for sales in the future. If you’ve added new staff, you’ll want to expand on that number, as the staff person will also be generating some additional revenue. Next, you want to look at what each service is sold for on average. That will give you that good break-even revenue number. It will provide you with a good idea of how many clients you expect to serve and what services you expect to sell to the client.
Other considerations are the economy, competition in your industry, and if you’re going to embark on some new marketing campaigns such as email marketing or social media marketing. See this article for more details.
Once you know your estimated revenue, you need to determine your costs. Every firm has fixed fees and variable costs.
Rent, payroll, and utilities are usually the three most prominent fixed costs a partner at a law firm or law firm owner will incur when running their business.
The variable costs are your hard costs. No, that may surprise the reader as when we think of hard costs, we consider them reimbursable from the law firm clients. But the law firm does have to upfront these costs, so the revenue needs to be there to pay for these advanced client fees. You don’t get refunded for that expense until billing time. There has to be some cash flow to determine what is needed to run the law firm and break even. Cash flow is all part of the break-even analysis.
Other examples of variable costs could be software or if you have to travel for a client. Research sometimes will fall in the variable category. If you have to borrow money at some point to keep the firm running, the interest could also fall into the variable bucket, especially this year when interest rates are expected to be raised multiple times. If your firm has staff attorneys that may need to be paid overtime to complete a matter or case, that can also fall under the variable cost.
Every partner at a law firm or every owner at a law firm should know this total. You can determine these fees by looking at costs every month. What is your monthly break-even point? And you can also look at this annually. What is your annual break-even point?
Factoring this equation is simple math, but it can seem like a daunting project. How can I ever guess the number of sales I will have in a year? That’s why we recommend breaking it down into a one-month projection. Determining your projected sales figures will help you to determine how much revenue is necessary to pay your expenses.
The cost of running your firm and breaking even is one of the metrics to track when you’re starting as an attorney with a new law practice. You want to ensure that you can cover your overhead, pay your employees, and make a profit. You also need to be able to cover any unforeseen expenses or opportunities that come your way.
If you are ready to start, call us, or book an appointment on our calendar.