Maximizing ROI With Law Firm Accounting And Financial Management

Law firm accounting and financial management is critical for success in the modern legal industry. Law firm owners should seriously consider the ROI they receive on their Accounting and Finance function, whether it be in-house or outsourced. Cheap is exceedingly expensive when it comes to accounting and advisory services for law firms.

Compliance Accountants

Most accountants are historical compliance accountants meaning they can tell you what happened in the past, but aren’t suited for forward looking strategic advice. In essence, they don’t help you run your business, they help maintain the status quo and more times than not the status quo doesn’t cut it. Things like bookkeeping, payroll, and tax preparation are all necessary, but have a fairly rigid ceiling on how much value can be added. The best a tax preparer can do, for example, is ensure you pay exactly what the law requires. 

The consequence is law firm owners don’t realize there’s another category of accounting professionals who focus on how to improve performance in the immediate future and are able to deliver an enormous amount of value compared to a service or employee focused on compliance. Every law firm with at least $2 million in revenue should be considering bringing on a virtual CFO as a strategic adviser to increase profits and receive more timely and refined financial analysis. 

Think about the consequences of routine business decisions. Hiring, firing, and investing in marketing to name a few. The cost of getting any of these wrong far exceeds the cost of a high performing virtual CFO. In addition, law firms are highly distinct businesses in that even small process changes can have a significant impact on profitability, but that sword cuts both ways. Most compliance accountants aren’t going to identify what’s causing problems with utilization, realization, or collections and the cost in lost profits can be hard to overstate. 

Each year small and mid-sized law firm owners make significant operational decisions and the cost of not getting these decisions right could easily be in the 6 figures. Republica can help you get these strategic decisions right by using both historical and real time data.

Below is a fairly exhaustive list of major decisions law firm owners may undertake in a given year, the cost of getting that decision wrong, and how Respublica can add value to the decision making process.

Profit Maximizing Advice

Another important consideration when determining the ROI of your law firm is determining if they provide real time data and best practices needed to increase utilization, realization, and collection rates. This is another area where Respublica can provide meaningful value. The average law firm has a 37% utilization rate combined with a 86% realization rate, and 89% collection rate. The industry is ready for operational improvements. Even modest improvements in any of these 3 key metrics leads to a material increase in profits. For example, increasing utilization from 37% to 38% isn’t significant, but holding all other variables equal, this increase would drive a 6 figure increase in profits for a law firm with $2 million in current revenue.

A compliance accountant is not focused on the data refinement needed to ensure real time analytics are available and the only way to improve a law firm’s finances is to constantly measure performance with real time KPIs. Respublica uses a modern data infrastructure capable of providing real time analytics that drive operational improvements and increased profits. A second critical area in assessing the value your firm is receiving from your current accountant is if they’re actively working on improving your lockup by implementing invoicing, payment, and collection best practices. This is an area where most small and midsized law firms need help improving and is critical to maintaining healthy cash flow. A compliance focused accountant will be more reactive as opposed to proactive in this area and the consequences to a law firm can be steep. Even a law firm that is profitable on paper, can go out of business if they become insolvent due to slow paying clients and outdated processes.

ROI of Compliance Accountant vs Respublica

Taking all of this into consideration let’s compare the ROI of a compliance accountant versus Respublica’s Virtual CFO service. 

Let’s analyze a law firm that operates in line with industry averages with $2 million in revenue, 2 partners, and 7 associates outsourcing their accounting to a bookkeeping firm for $2,000/month. This particular law firm would receive monthly financial statements, accounts receivable, accounts payable, and IOLTA trust accounting.  In this example, let’s say the value provided is equal to the cost of the service or $24,000 annually. Compared to hiring a full time bookkeeper for $65,000+ per year or having to manage a part time bookkeeper the compliance firm is providing value at $2,000/month. 

Let’s assume this same law firm hires Respublica to be their virtual CFO for $5,000/month providing unlimited real time KPI reporting, a 5 year budget, monthly reforecasting, actual vs budget results, and what if analysis to ensure all major decisions are informed by data. Based on implementing best practices and correcting inefficiencies around utilization, realization, and collections, we can conservatively estimate a 2%-4% increase in each metric, which would yield approximately a six figure increase in annual profits. 

Let’s say throughout a normal year this law firm makes 6 consequential business decisions. For example, they hire a new associate, decide to invest more in marketing, roll out a fixed rate service offering, implement a cloud based legal management software, and conduct a client profitability analysis to see if they can reduce hours without jeopardizing profits. What’s the value of having Respublica by your side before you make these decisions?

When hiring a new associate, for example, do you know what utilization the new associate needs to achieve to maintain the firm’s profitability? Do you know the maximum your firm can pay the new associate based on estimated utilization and billing rates? The cost of not getting compensation right and losing new hires due to underpaying or over paying and reducing profits is in the tens of thousands. A compliance accountant will not be able to offer much value during this decision. Another common example is wanting to Invest in marketing to grow your firm. Before you can make any informed investment decisions you need to know which clients and practice areas are most profitable and what the cost per lead and cost per client for each marketing medium is. The cost of not having reliable marketing data readily available before initiating a marketing campaign can lead to over 50% in wasted and inefficient spend. 

Another area where Respublica provides value to clients is driving legal management software implementations. It can’t be emphasized enough that law firms need to be using modern, cloud based, legal management software. The immediate efficiencies in timekeeping, client intake, and client invoicing more than covers the costs. With that said, it can be overwhelming for a law firm owner to conduct due diligence when there are so many different options and each software contains nuance in user experience and data availability. When considering the ROI of your current accountant it’s important to take into consideration if they are advising on the best legal management software for your firm. If you’re firm is considering implementing a new legal management software and your accountant will be not be adding value with due diligence and implementation, then you need to consider the following questions:

• Do you have the time to think about how data structure will impact KPIs and reporting?
• Do you have time to do due diligence and learn about the myriad of different legal management software solutions?
• Do you have time to implement the system?
• Am I willing to spend close to $10,000 in potentially billable time due to due diligence and implementation? 

If the answer to any of the above questions is no, then consider Respublica’s virtual CFO service. We can provide guidance, make a strategic recommendation, and lead the implementation so you can be confident your business is ready to grow and maximize profitability.

Another area worthy of consideration when analyzing the value your firm is receiving from your current accountant is if they are providing by matter and by client profitability analysis. This detailed reporting can highlight if any individual clients or matters are driving inefficiencies. Clients with high realization or collection write-offs need to be identified and law firms should consider letting those clients go. Some important questions to ask in this area include:

• Do you have the ability to drill into realization and collection write offs to see why those write offs were necessary?
• Do you know if those write-offs were a result of a bad client or poor efficiency in the delivery of services?

If your law firm executed on its legal services in line with expectations set with the client and communication was satisfactory, but the client insisted on a reduced invoice it may be a sign that client isn’t worth your firm’s time.

Once again, most accountants are focused on historical results and their services can be categorized as compliance oriented. We have detailed the yearly cost of only receiving compliance accounting to be in the six figures when considering the continuous inefficiencies, the lack of timely sound counsel, the availability of data, and the inability to capitalize on outperformance or mitigate and adjust for underperformance. This is all due to the fluctuating nature of tracking and analyzing legal services. If you’re ready to take your firm to the next level and want a virtual CFO that can help you maximize profits, schedule a call and we’ll walk you through how we can optimize your law firm.

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