Take The Mystery Out Of Financial Metrics
by Ed Poll
Every law firm is a business, and every business should know where it’s going. Like the driver of a car, a lawyer must look out the window to see what’s ahead (analogous to identifying new matters for generating additional revenue) while glancing at the dashboard to make sure all indicators (in this case, of financial performance) are positive.
Admittedly, today’s financial information systems and software can and do produce extremely detailed assessments of financial performance. However, many of these programs tend to provide far more data than can be assimilated intelligently.
When you take your car to the shop, the mechanic gives you a detailed picture of performance under the hood by hooking up engine analyzers, lab scopes, compression gauges, onboard computers and a host of other equipment. When you’re driving, though, all you want to do is glance at the dashboard and see how fast you’re going, whether the engine’s running hot or cold and how much gas you have left.
In terms of financial metrics, the dashboard glance covers financial benchmarks that help law firms measure their business effectiveness by analyzing profitability, cash flow and collections. Lawyers who understand financial benchmarking can explore operating efficiencies in the firm, gauge the firm’s performance relative to its financial goals, and better assess and reflect value to clients in their bills.
For effective benchmarking, three measurements are paramount:
Make it visual
The final challenge is to keep track of the key metrics. The most practical approach is to use software that makes the assessment process virtually automatic and points out major variances for attention.
For example, a law firm can focus on PPP (profit per partner), billing turnover rates (how frequent is the accounts receivable turning) and a host of other important financial measurement tools.
The “dashboard” concept can be applied to the benchmarked financial information compiled by software programs, with important financial metrics displayed in an easy-to-understand visual format for use by firm management, or simply for a lawyer’s personal review.
The illustration of each metric should be visually appealing, presented either as bar graphs or line charts. You should minimize the information in each visual — no more than the current 12-month trend plus the same month of the prior year, with longer timeframes where appropriate. A graph of profits per partner, for example, might show five years of results.
The most important goal of creating and evaluating a financial dashboard is to spot problems quickly and adjust the firm’s activities so that financials remain positive. When properly displayed in an understandable format, the dashboard can take the mystery out of financial data, even for lawyers whose undergraduate and law school training lacked practical business focus.
Copyright 2011. Edward Poll. All rights reserved. Reprinted with permission from Edward Poll.
Ed Poll is the principal of LawBiz Management. He is a nationally recognized coach, law firm management consultant and author. He practiced law on all sides of the table for 25 years - as a corporate general counsel, government prosecutor, sole practitioner, partner and law firm chief operating officer .. and as a client. He also owned and operated several manufacturing businesses. For the last 14 years, Ed Poll has been coaching and consulting lawyers and law firms in the areas of strategic planning, profitability analysis and practice development. He has been called as an expert law firm management witness by the State Bar of California Trial Court, appointed as a Trustee of law firms convicted of disciplinary violations. He currently facilitates Managing Partners Roundtable consisting of some of the largest law firms in the country, Executive Directors Roundtable, as well as Diversity Directors Roundtable.
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