‘Writing in the Margins: Just How Much Does Your Overhead Cut Into Your Revenue?’
Law firms often focus on gross revenue, when calculating how much they make. But, there are expenses that go into running every business, including a law firm. And, gross profits aren’t what you really make. What you really make is your gross profit minus the cost of expenses for running your business. And, this can be expressed in a number of ways. Knowing your profit margin is useful for finding out how much you ‘net’, in terms of revenue from your practice. You could also consider the notion of an effective hourly rate = how much you make per hour, minus your case expenses. Understand that, and you know what you truly make in your business.
Now, to figure out your profit margin, you need to have a strong grasp on your expenses – and, this is where law firms often fall down. While it’s relatively straightforward keeping track of gross revenue using standard law firm tools like time & billing software, or law practice management software – law firms generally do not do a great job of keeping track of expenses; and, the majority of law firms budgets are too broad, for making effective calculations, as to cost types, including for specific cases, and with respect to administrative expenses.
So, if you want to get to the bottom of how much you’re making these days, you have to pay more attention to your budget, including attributing expenses at a much deeper level than you are right now – because more sophisticated calculations require more specific data inputs.
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If you want to get a better handle on your law firm budget – so you can calculate your effective rate more effectively – give us a call!
The Rhode Island Bar Association offers free law practice management consulting services through Red Cave Law Firm Consulting.
To request a consult, visit the Rhode Island Bar’s law practice management page, and start running your law firm like a business.