The 6 Key Numbers Every Lawyer Should Know About His/Her Law Firm

Law Firm FinancialsThe content in this today’s post was sent by RJon Robins, via email to his subscribers.    This is valuable information and an area that many attorneys need to learn more about.

The last few days I’ve been harping a bit on the importance of “knowing your numbers”.

Yesterday, I said that the “Key” numbers for the owner of a solo or small law firm to be on top of are as follows:

1. Budget

2. Budget Variance Report

3. Cash Flow Projection (6 weeks rolling)

4. Aged A/R By Account

5. WIP

6. Cash Position (Operating & Trust)

In response, a few lawyers asked me to explain why Balance Sheet is not on my “short list”.

A couple more thought their YTD revenues should make my top six list.  They all made very nice arguments that I’m not going to distract you with here.

Instead, here’s the explanation to each of these questions, so you don’t let yourself get distracted…

Balance Sheet: Financial accountants love balance sheets.  So do book keepers.   Management CFO’s aren’t nearly as impressed with the balance sheet however.  There are two principal reasons for this big difference in who cares more about what.

First, the balance sheet for solo & small law firms is mostly fictitious.  In other words, the assets don’t really matter.  Assets don’t pay bills.  Cash flow does.  Assets don’t hire staff or fund marketing campaigns.  Cash flow does.

Balance sheets, which are driven by the estimated value of assets against the estimated total of liabilities tell you how much “equity” you have in your law firm.  So what?  Who cares?

Would you rather own a law firm with one million dollars of “equity” and flat, anemic or even negative cash flow; or a law firm with half as much equity but twice as much positive cash flow?

THAT is why Management CFO’s of law firms don’t worry too much about balance sheets.

Because cash flow (which is driven by the 6 key numbers) is what really makes a difference in how you manage a small law firm.

YTD Revenues:  Year-to-date revenues are nice to know about.  This number helps put everything into perspective.  It’s a great way to pat yourself on your back and congratulate yourself for a job well done.  I look at my YTD revenue every month and every year I look forward to “Breaking The 7 Barrier” earlier & earlier in the year.

But YTD revenues don’t drive forward-looking decisions.

YTD revenues are like looking in your rear view mirror or at a line on your GPS screen that tells you where you have been.

YTD numbers are good for nostalgia and filing your tax returns.  But they don’t drive ongoing, forward-looking management, marketing, sales, staffing or any other of the critical decisions that management of the law firm must make on an ongoing basis to ensure profitability and a balanced lifestyle.

If this is all news to you, don’t worry.

You’re not alone.  None of this is anything they teach any of us in law school.

If you “know” this stuff but you’re not making monthly management decisions based on what your six key numbers are telling you, then I absolutely-promise you that you are NOT coming close to having the most profitable, predictable and/or the most professionally-satisfying law firm that you COULD be enjoying.

There is a reason why the MOST successful law firms in the country have a CFO on their team too.

You can be your own CFO.  It just might be a thousand times harder for you to be your own CFO than to get some outside help.  And way-more-expensive for you to try and be your own CFO too.  But not as expensive as NO-ONE being the CFO of your business.  That’s REALLY expensive!

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RJon Robins

About RJon Robins

Upon opening his own solo law firm RJon fell flat on his face. But then he quickly realized that despite having done quite well in law school, completing a prestigious 9 credit internship with the US Trustee’s Office and clerking for a Federal Bankruptcy Judge, he knew next to nothing about how to actually manage the business of a small law firm. RJon did eventually discover how to manage a small law firm and was recruited by The Florida Bar’s Law Office Management Assistance Service (LOMAS) to teach his fellow lawyers how to find, fix and avoid the sort of marketing, sales, management, staffing, and financial control problems that had plagued his law firm. As a LOMAS Small Law Practice Management Advisor RJon had the unique opportunity to work with several thousand owners of law firms to diagnose the source and help them fix the problems that plagued their law firms too. In 2008 RJon founded How To MANAGE a Small Law which has since grown to be one of the leading solo and small law firm management advisory services, dedicated exclusively to the unique needs of the owner of a solo or small law firm. Today How To MANAGE A Small Law Firm boasts coast-to-coast membership with ambitious and entrepreneurial lawyers hailing from all practice areas and walks of life. RJon graduated from The American University in Washington, DC and received his Juris Doctorate from Nova Southeastern University, in Ft Lauderdale, Florida in 1996. RJon is licensed to practice in both state and Federal court in the State of Florida.

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