Best Practice Tips: Small Law Firm Financial Performance Indicators

Asked and Answered 

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

Q. I am the owner of an estate planning firm in Milwaukee, Wis. I have five associates and four paralegals working in the firm. More of my time is spent on managing the practice and marketing than on servicing clients. I am trying to develop financial goals for the firm, but I am clueless as to what financial indicators or ratios I should be looking at and what constitutes good or bad performance. Anything that you are willing to share would be appreciated.

A. Here are what I believe to be key financial indicators/ratios and performance indicators for a firm of your size and type:    

•  Owner compensation – 40 percent of gross revenue
•  Overall compensation – 65 percent of gross revenue
•  Staff and non-equity attorney compensation – 25-30 percent of gross revenue
•  Paralegal compensation – 4 percent of gross revenue
•  Support staff compensation – 15 percent of gross revenue
•  Marketing – 2.4 percent of gross revenue, 8-10 percent for estate planning firms
•  Rent and other occupancy expense – 7 percent of gross revenue
•  Reference materials – 1.4 percent of gross revenue
•  Equipment/technology – 2 percent of gross income
•  Lawyer income (associates and owners) – 59 percent of gross revenue
•  Other expenses – 10 percent gross revenue
•  Annual revenue collected per lawyer – $300,000
•  Annual billable hours – 1,500-1,600 associates; 1,100-1,200 paralegals

I like to see profit margin – owner compensation – salary if paid as W-2 wages plus profit in the range of 35-45 percent. Performance can vary by type of practice.

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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.