Best Practice: Law firm margin/profitability ratio - Net income to gross revenue

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am the owner of an elder law firm in Boston. I recently closed out the 2012 books for tax preparation, I'm reviewing my annual numbers from what was my 4th year in solo practice and wondering how I'm doing. Is there some kind of benchmark/goal or can you share any advice about an ideal ratio between gross income and overhead costs?

A. I usually say 35-45% margin (net income divided by total fee revenue) which is supported by most of the survey data. (Expenses used in determination of net income defined as total expenses less owner/partner compensation). However, I have some law firm clients that have 20% margins were the partners/owner are taking home $1,000,000 per year. So margin sometimes tells only part of the story. Depends upon the area of practice and practice/leverage structure. Solos operating with virtually no staff may have a margin of 80% but only taking home $40,000. ($40,000 net income divided by $50,000 fee revenue - only $10,000 in expenses.)

Be careful of using the term overhead as this often refers to expenses less all producer compensation. (partners, owners, associates, and paralegals) I assume that by the term overhead you are referring to total expenses less your compensation or draw.

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John W. Olmstead, MBA, Ph.D, CMC,(www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com