As a lawyer, developing an understanding of the fundamentals of firm financial management will ensure that your law firm is on the path to economic growth.

Law Firm Financial Management, Defined

Law firm financial management refers to the analysis, planning, organising, directing, and controlling of the financial operations of a law firm. 

It can include, among all other activities, the preparation of financial reports such as the cash flow and profit-and-loss statements used to predict and plan for revenue growth.

Law Firm Financial Management Best Practices

Here are five ways law firms can improve their law firm financial management.

Best Practice 1: Track Financial KPIs

As a lawyer, the practice of law comes first-hand; however, understanding how to support revenue growth and guide your firm's success is often another hat you’ll need to wear. 

Understanding the following Key Performance Indicators (KPIs) will help you accurately monitor your firm's financial performance and support its growth.

These include but are not limited to the following:

• The amount of revenue billed per month.
• The realisation rate: the amount billed as a proportion of the number of hours worked.
• The amount of income collected per month.
• The collection rate: the amount collected as a proportion of the amount billed.
• The amount of firm debt, including but not limited to lines of credit, credit cards, and loans.
• The current run rate: the projected annual revenue based on the past three months.
• The total amount of anticipated yearly costs, including salaries.
• The difference between your current run rate and current anticipated annual costs.
• The operating account balance.
• The number of accounts receivable (AR) outstanding.
• The age of accounts receivable.
• The net income as a percentage of revenue.

Include the above KPIs in your law firm's financial management plan will help answer questions such as:

• Which lawyer or client contributes to or reduces your profit?
• Which marketing expenses lead to your most valuable clients?
• Are your clients happy?

Best Practice 2: Plan Your Cash Flow

Managing your law firm's cash flow to be reliable yet flexible will set your practice up for growth.

Without historical cash flow data, it can be challenging for lawyers to forecast their finances accurately when starting. Additionally, they may only get paid once their settlements have been finalised. Cases can also take longer than expected, and professional liability risks can arise, making it all the more difficult. 

If this is the case, and access to numbers is restricted, begin by tracking from the get-go. These numbers will guide you on which to base your planning further down the track.

Either way, new or seasoned, it's essential to create cash flow projections that align with your financial management plans.

Best Practice 3: Leverage Law Practice Technology

Utilising law firm financial management technology can dramatically reduce your firm's time on financial management while maximising productivity. Let's see how.

Costing & Billing

• Save time with streamlined and accurate billing procedures to improve your bottom line.

Manage Reporting

• Utilise an extensive library of pre-built reports and the tools to create custom reports and alerts and simplify your firm’s financial and performance reporting.

Legal Practice Payroll

• Generate fully integrated payroll within your firm by utilising a single data source, from automatically captured time to entitlements.
• Automatically generate payslips that can be emailed directly to your employees.

Legal Software Trust Accounting

• Deliver transparency and integrity.
• Operate confidently that your firm complies with Australian Trust Regulations for managing trust accounts and investments.

Financial Accounting

• Receive everything your firm needs for day-to-day accounting, budgeting, and financial reporting.
• Encompass a fully integrated system that removes waste and enables a truly paperless office. 

Improved Processes

• Utilise an accurate billing process to improve your bottom line.
• All costs, fees and disbursements are integrated from one source.
• Have a workflow automation system on hand that triggers follow-ups for outstanding debts.

Best Practice 4: Pay Your Employees and Yourself

If you're heading up your own firm, you may already be conflicted with the expectations of compensating yourself. Prioritising and paying yourself is essential—after all, how can you support your clients if you can't support yourself?

To help you set a realistic salary, use tools such as online calculators specific to hourly rates. Also, reach out to industry associations for salary insights. They can help set salaries for yourself and additional staff regarding long-term planning.

Regarding how you are paid, there are two main options for business owners. One, you can pay yourself a salary just as you would any other employee and withhold taxes. Or, two, you can draw payments from business profits on an as-needed basis. Either way, your firm will require a payroll system.

Be sure to engage a legal accountant when setting up your initial payroll—for your staff and especially yourself—this will prevent any surprises come tax time. As mentioned above, legal practice management software can help you stay ahead of payroll. 

The Only Way is Up 

While the whole process may seem daunting and essentially another career role on its own, breaking the law firm financial management process down into smaller tasks will make it easier to set your firm on the path to financial growth.

And remember, bringing in a professional is fine if you're new to this process, providing your budget allows for it. Outsourcing professional support will save you time, mitigate frustrations, and allow you the energy and resources to do what you do best–serve your clients.

Contact LawMaster to find out how you can free yourself and your team to focus on the all-important billable work. With a complete, scalable financial system that will grow as your firm does, their advanced, integrated and flexible features will dramatically reduce the time your firm spends on financial management while maximising your productivity.