Otterburn Legal Consulting
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Law firm profitability

Law firm profitability and cash flow

Achieving good levels of profitability and cash flow is essential in any law firm.  It is a pre-requisite for success and without it firms fail.

The starting point for effective financial management is to benchmark your firm’s performance against others and each year I use published surveys such as the LMS annual Financial Benchmarking Survey or benchmarks based on a sample of my clients.

I also undertake a bi-annual survey of firms in Ireland.

Much of my consultancy work focuses on law firm profitability and cash flow.  The key areas I review are:

  • profit per equity partner
  • net margin (after allowance for equity partner notional salaries
  • salaries relative to fees
  • overheads relative to fees
  • departmental gross margin
  • lock up days
  • capital to borrowings ratios
  • profit to drawings ratios

It is especially important to review departmental gross margin as any improvement at this level is likely to flow straight to the bottom line.

Click the link to download an article I wrote for the Law Society on profitability in private client departments

Law firm business sustainability

For guidance on Business Sustainability and a spreadsheet to calculate key ratios for your own firm go to The Law Society of Scotland site on Business Sustainability.