Best Practice Tips: Key Financial Goals and Metrics for Law Firms

Asked and Answered

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

Q. I am a newly-elected managing partner of a 14-lawyer firm in San Diego. Although I was elected to this position, I feel disadvantaged because I don’t have a financial background. What metrics/measurements should I be looking at?

A. Here are a few metrics that you might want to consider:

• Fees collected (firm-wide and individual)
• Net income collected (before partner compensation)
• Fees collected per lawyer
• Average client production (billable) hours per lawyer (firm-wide and individual)
• Expenses per lawyer (before partner compensation)
• Income per partner (before partner compensation)
• Profit per lawyer (before partner compensation)
• Profit per partner (before partner compensation)
• Profit margin (before partner compensation)
• Billing realization (firm-wide and individual)
• Collection realization (firm-wide and individual)
• Effective rate (firm-wide and individual)
• Profit index – 1.00 or greater
• Client satisfaction – 94 percent or higher – mean score of 4.5 or higher, etc.
• New client/case signups
• Other new business measures
• Ratio of PB (prospective business) conversions
• Dollar value of working capital = current cash based assets + WIP + AR minus
  current cash based liabilities + accounts payable and other current liabilities. Reflects the firm’s ability to be operated from day to day.
• Current cash based assets + WIP + AR should always exceed current liabilities + accounts payable.
• Current ratio = current cash based assets + WIP + AR minus current cash based liabilities + accounts payable and other current liabilities (ratio should be >1:1 – the higher the better). Desired ratio is 2:1.
• Acid rest ratio = cash + accounts receivable divided by current liabilities + accounts payable. (Ratio should not be < 1:1). Acceptable ratio is 1:1.

Once firm goals, financial and non-financial are formulated, either run reports that are available from  your system or develop special Excel reports than measure goal accomplishment.

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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 and author of The Lawyers Guide to Succession Planning published by the ABA. 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.