Law Firms: Measure your success using key performance indicators (KPIs)
One of the ways you can measure the numbers that tell the story of your law firm's success is by using key performance indicators (KPIs). A KPI is a fancy acronym, which sounds daunting, but in reality, it is just any kind of measurement that you are going to benchmark yourself against either your own goals or your industry goals. They are a driver of the success of your business.
It’s important to note that it is not enough to go through all the trouble collecting the data and studying it. You also need to make a plan and implement your findings, otherwise, you have wasted your efforts. Analyzing some KPIs is better than studying none. You will be astonished by the insight they bring to you.
But how do you choose what to measure? And how do you implement them? Here are some ideas using QuickBooks Online Advanced.
Cash (flow) is King or Queen!
Always, and especially right now, cash flow is a crucial component for businesses. Even for accountants cash is the lifeblood of our firms. When cash flow is interrupted, slowed, or depleted, it can mean the end of a business or stop it right in its tracks. Let’s call it today’s most pressing KPI.
There are ways to ensure you and your clients know exactly where cash flow stands at any given moment. QuickBooks Online Advanced’s cash flow trendline dashboard card makes it easy for Master Admins to analyze money coming in. Find it in the Reports → Performance center as pictured below:
As an accountant, I love that this report is handy for my clients. They can pop in any time they are in QuickBooks and see real-time data on the pulse of their firm.
Improving cash flow
There are three initial items I look at when assisting a client to help them with cash flow:
- Accounts Receivable: Looking at the aging report is my first step. How many customers are 60 or 90 days out? Will efforts here instantly improve cash flow? Can I use the workflow feature in QuickBooks Online Advanced to assist me with reminding past due clients automatically that they have unpaid balances?
- Using Merchant Services: I cannot tell you how many clients tell me they are resistant to having their customers pay by credit card. They don’t want to pay the merchant fees. When I explain to them that payment by credit card is 39% faster than by check and mail. This one change can make a world of difference in reducing old accounts receivable and keeping the firm flush with a more steady influx of cash. I prefer to recommend Gravity Legal for trust-related transactions. It integrates with LeanLaw, my preferred legal software.
- Accounts Payable: When cash is short, contact your vendors and make payment arrangements. It is better to be proactive with vendors than not. Most will work with you as long as you keep to any arrangement you set up. If your business has inventory, can you hold off on ordering more and try to move the inventory you have in stock? Are there some expenses you can hold off on for now? Are there some subscriptions you signed up for that you are not using that you could eliminate entirely?
As mentioned above, cash is king. As we dive into financial analysis, it is important to focus on metrics that impact cash. The number one reason that most small businesses fail is a lack of cash flow.
More ways to analyze using KPIs
Deciding on the overall mission or goal of your law firm is the first step. KPIs allow you to measure the things that indicate whether or not your business is healthy or growing successfully. One of the ways we track whether your client pipeline is robust is by measuring inputs and outputs. Gauge what is coming into the firm and what's going out of the firm. Compare the two figures to see whether or not your marketing efforts are working.
Historically, small business owners focus on what they are providing to the client. It is crucial not to focus just on what you're offering to the client or the output, but look at what the client's needs are and the client's overall experience with your law firm.
Study the Workflow
As an accountant, I like to start by looking at my client's workflow. And then match the workflow to the KPI. Tracking many different areas is helpful, but be careful of KPI overload. Pick two or three to start. For example, if you have not been seeing a lot of repeat customers or customer referrals, it is essential to find out why that is. Look at your net promoter score around the full client experience. How much does it cost you to acquire new customers? You would be surprised at how many business owners do not know their customer acquisition costs. The next metric is if the customers are coming in the door, are they the customers you want to see in your firm? What is the return on investment?
Did you know that QuickBooks Online Advanced now has a business performance center built into the product? Yes, it is a phenomenal tool to be able to analyze data and KPIs right within the program. You can build your own charts with Advanced’s custom chart builder feature, tracking metrics that are best for your client to track and displayed in the performance center for easy tracking and visual understanding. I can see my key metrics of income, expenses, cost of goods sold, gross profit, and net profit all from my dashboard. And, it also tracks trends in real-time. So you can see when the trend is headed downward and take action immediately.
My Top Five KPIs To Track
Here are a few of the KPIs I recommend tracking:
- Cash on hand/cash flow. If your client has a hefty invoice that doesn't get paid, can you pay your bills next month? I like to see a client having a minimum of one month's cash available to pay bills. It is important to start saving money when cash flow is good to save for these times when there is an economic downturn.
- Profit percentage to revenue. Use this to benchmark with other businesses within the industry. If your business is healthy, this number must be positive. Healthy percentage 10-15% range.
- Track accounts receivable over 30 days. This KPI is the total number of invoices to open accounts receivable. The goal is 0%. Businesses with poor cash flow tend to be notoriously bad at chasing outstanding invoices over 30 days.
- Labor percentage or total labor cost divided by total revenue. Total labor cost in a business; this is the highest expense at a law firm. How much is that? Can you grow and add to your staff? I like to see this KPI at 30%. Are you getting sufficient production out of your team?
- Realization rate. This one is harder to calculate. I look at how much was spent this month, and how much was collected? In a perfect world, I'd like to see 100%, but in the real world, this is not the case. Also, check how much is written off.
The benefits of data-backed decision making
Remember, with KPIs, we often are looking backward as we forensically dive into the records. That knowledge can also become a forecasting tool. Customer development is the place to start because cash is king. Your clients don't want to wake up one morning and not have the money to cover payroll.
The net promoter score and some of these other metrics will be the differentiator for your company and your nearest competition. Look at these monthly or 18 months trailing on reports. Try to go back to the data for at least 12 months.
My last piece of advice is don't get too detailed or granular right away. Look at each KPI from an overview perspective. For example, if you are analyzing your accounts receivable, look at your aging. If half of your receivables are over 90 days, there is a problem. You don't have to change your billing necessarily, but you do need to change your collections process.
Find out if your clients are happy with your services. Satisfied clients are your most important KPI measurement because clients provide you with cash. Happy clients equal a profitable practice. It is not the other way around.
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