The financial health of your law firm should be a consistent goal no matter what’s going on in the world. But as we slowly emerge from more than a year of lockdowns and financial instability, financial health becomes more critical than ever. Law firms are businesses at their core. Without financial health, there can be no business.
For many law firms, things look drastically different than they looked before the pandemic. Maybe you were forced to downsize over the past year or you chose to focus on different practice areas. Your firm’s entire staff may now work remotely with no brick-and-mortar location. Whatever the case, as a firm leader, it’s important to take a minute to evaluate your law firm’s current health.
As 2020 exemplified, we have no clue what may be coming around the corner. 2021 will be a year of transition, as legal practices move towards a new normal, but it should also be a time of preparation for future business interruptions.
There are four fundamentals that law firm leaders can consider when examining the financial health of their practice. Understanding these basic components can be critical to achieving law firm stability in 2021.
#1 Counting Dollars and Cents
Of course, counting dollars and cents is the first step to assuring a law firm’s financial health. Firm leaders should examine financial and operational components related to:
- Cash Flow – This is the amount of cash that moves in and out of a firm, including income and expenditures. Adequate cash flow helps law firm leaders avoid the pitfalls of overutilizing credit. It also provides a cushion for surviving troubling financial turns.
- Profitability – This is the revenue that law firms generate in excess of costs and expenses. It is a vital factor in determining the health of a law firm. With an eye towards profits, law firms can work towards cost-cutting and increased efficiency.
- Liabilities – These metrics include a firm’s accounts payable, office costs, and accrued expenses. Liabilities are the financial obligations that attorneys need to keep their law firms up and running. All incurred costs should be examined carefully. Anything that fails to promote the delivery of quality legal services should be questioned.
- Debt – Debt is a major aspect of a firm’s financial health. For example, some firms took out business loans to maintain their viability during the pandemic. But carrying too much debt can place an overwhelming financial burden on a practice. In 2021, firm leaders need to address large debts with a focus on paying them down.
When leaders have a real understanding of their practice finances, they can make informed decisions about the financial health of their law firm and the best direction for profitable growth.
#2 Technology is Key
COVID didn’t stop the digital revolution that we have been witnessing within the legal industry. In fact, it expanded it and there is no going back. Technology-enabled many law firms to keep serving clients even when it wasn’t physically safe to go into an office or the courtroom. The COVID crisis forced law firms to take bold steps in embracing technologies – steps that they had resisted for years and years.
Firms across the nation scrambled to purchase new platforms and adopt new technologies under unforeseen pressures. As a result, some of this implementation was done without adequate planning.
For example, maybe you chose a traditional legal billing system that failed to meet the increasing remote needs of your firm. Now, that the crisis is subsiding, this is a great time to take a look at those decisions and make changes that will place your firm in a better position.
TimeSolv’s legal billing software uses cloud-based technology to provide law firms with the security and accessibility that they need to thrive in an increasingly remote society.
#3 Improved Processes and Operations
The crisis also forced many law firms to quickly alter their regular procedures and operations. With firm members working from various locations, consistency became vitally important. After all, regular client intake, time entry, billing, and collection procedures are essential to maintaining a firm’s financial wellbeing.
While you may feel compelled to reverse some of these policies and return to pre-Covid practices, a thorough review may reveal that these changes brought about significant cost savings, greater productivity, and increased profits. You may find that these new processes are the best option for the future of your law firm’s financial health.
#4 Staffing Considerations
Practice leaders need to also consider the connection between their staffing decisions and the firm’s financial health. The circumstances of 2020 may have resulted in less than desirable productivity among attorney and support staff members. This could have resulted from communication disruptions, technology inadequacies, or any number of other challenges.
Examine your current staffing status and take steps to set clear standards and expectations for all personnel. Consistently monitor performance and take appropriate actions when it falls short of your expectations.
A firm cannot reach optimal financial health when revenue is wasted on underperforming personnel. If a lawyer or paralegal’s contribution to the firm’s revenue does not meet or exceed the cost of their compensation, benefits, and overhead, they are not positively contributing to the firm’s financial health.
Financial Health is Critical for Law Firms in 2021
The financial health of your law firm is always important. But as we move through 2021, it will be more vital than usual as law firms transition to a new normal and prepare for future potential disruptions. With an understanding of these basic components, law firm leaders can take steps at achieving law firm stability in 2021.