Law Firm Financial KPIs

This is blog number three in a series and follows Law Firm Dashboards 101 and Law Firm KPIs and Metrics. In this blog I will discuss in more detail the law firm financial KPIs.

What are Financial and Operational Activities

According to the Market Business News (MBN), financial activities are activities that are undertaken to help achieve a company’s economic goals and objectives. Anything to do with the movement of money.

Investopedia, defines operating activities as the functions of a business directly related to providing its goods and/or services to the market. These are the company’s core business activities.

Sounds clear enough but I imagine there are some who would ask why a particular KPI was put in the financial KPI group and not in the Operational KPI group, and vice a versa. A good question without a particularly good answer.  I would respond by saying that the grouping of the KPIs is not as important as whether you are tracking the KPIs.

The best use of KPIs

In a previous post, Law Firm KPIs and Metrics I mentioned that KPIs help provide accountability, help in the real time measurement of goals, and help in strategic decision making. Another benefit of tracking KPIs is that they enable law firms to make comparisons. The three major comparisons are comparing to budget (a goal), comparing to a prior period, and comparing to an industry benchmark.

When comparing to a prior period, be sure to use the same dates; for example, compare the first quarter to a first quarter and not just the three months prior.

Before you can compare to an industry benchmark you will need to find one. There are several legal industry surveys your law firm can participate in and often, participation will allow you to receive a copy of the completed survey. State Bar Associations, the Association of Legal Administrators and some legal industry consultants and vendors conduct annual surveys. It is important to remember that, when comparing to an industry benchmark, you ensure that the category to which you are comparing includes firms that are similar in size to yours, are geographically similar, and have similar practice areas.

The KPIs

Unbilled days/uncollected days
  • These KPI’s show how many days of unbilled work in progress (WIP) you have and, how many days of outstanding accounts receivable (AR) you have. The lower the number, the better, because the faster you bill what is worked and collect what is billed, the faster you will get paid. It is important that recorded WIP on contingent and other alternative fee matters is excluded from this calculation because otherwise the numbers will be skewed. These KPIs, when compared with similar periods, goals, or industry averages will allow management to react more quickly to possible issues. This KPI is usually provided to firm and practice group management.
  • Calculation: Total recorded WIP for say 90 days/90 days = average daily value; Total WIP /average daily value = Unbilled days
  • Calculation: Total recorded Billings for say 90 days/90 days = average daily value; Total AR /average daily value = Uncollected days
Net income as a percentage of revenue also known as Net Profit margin
  • This margin is one of several numbers used to measure how well a firm is performing.
  • Calculation: Net Income/Total revenue X 100 = Profit Margin as a percent of Revenue
Bank Account Balances
  • Provided to firm management, this KPI shows the current bank balances of all accounts.
Fees billed per month and fees collected per month
  • Very simple KPI on their own, but can be helpful to individual timekeepers, practice groups and others to track their goals. Every timekeeper in the firm should have access to this KPI.
Firm debt (lines of credit, credit cards, loans, etc.)
  • Provided to firm management, this KPI allows them to see the total firm debt at any given time.
Average net overhead
  • Net overhead is overhead attributed to the business operation and does not include overhead related to the product or service. In a law firm, that would include costs such as rents, administrative salaries, technology, insurances, and other operational costs. Net overhead is a vital tool in profitability calculations. It can also be provided to management to assist in strategic decision making. The KPI is most often compared to a similar period or to a budget.
Amount of revenue per square foot of office space
  • This is often compared to an industry benchmark. If your firm is lower than the benchmark, you may have too much space or you may not be using the space efficiently. Additionally, firms that have more than one office could make some comparisons between offices to gauge efficiencies.
  • Calculation: Total square feet on your lease/revenue earned in that space = Amount of revenue per square foot of office space
Current revenue run rate
  • Used to predict future revenue based on current revenue. As an example, extrapolate revenue from the last three months and extrapolate that over the next 12 months. Everything else being equal, this will allow management to gauge possible annual revenue.

There is a need for caution with this as not every month’s revenue is the same. Many law firm administrators would say January and February revenues are often the lowest and December revenues are often the highest.

  • Calculation: Revenue last 3 months/3 = Current revenue run rate X 12 = Anticipated Annual Revenue
Current anticipated annual costs
  • This is the same as current revenue run rate but relates to costs. This KPI includes all costs, including salaries. The same caution is needed because costs are not the same in each month. This number, together with the current revenue run rate, will allow management to get a very rudimentary net profit number.
  • Calculation: Costs last 3 months/3 = Current anticipated annual costs X 12 = Anticipated Annual Costs
Rate analysis
  • Information regarding rates can be useful in many ways. They are often used in profitability calculations. The rate analysis will allow timekeepers to see how their billable rate varies. This will give them the opportunity to manage those variances.
Revenue per employee/attorney
  • This is a simple calculation and can be reported in many ways, by all employees and by attorneys. In addition, it can be compared to an industry average, to the same period as last year, or a goal.
  • Calculation: Total Revenue/# of employees = Revenue per employee  Total Revenue/# of attorneys = Revenue per attorney
Realization rates
  • This KPI deals with what is realized and not utilized. It can be broken down into a few different KPIs and can be tracked as a billing realization, collection realization or total realization. This rate is useful in profitability calculations. When comparing similar periods or industry benchmarks, management can easily track and investigate any potential issues timely.
  • Calculation: Billed value/billable value X 100 = Billing Realization rate   Collected value/Billed value X 100 = Collection Realization rate  Collected value/Billable value X 100 = Total Realization rate
Cash flow analysis
  • This KPI is generally provided to the firm management and would show the ability to cover expenses for the next 15 or 30 days. The KPI would include up to date cash balances together with known expenses (including payroll) for the next 15 or 30 days.
  • Calculation: Cash on hand – all known expenses (for a set period) = Cash availability
Outstanding accounts receivable (AR)
  • This KPI can be run in many ways including showing firm, billing timekeepers, or client and matter totals. Often a law firm’s accounts receivable report is lengthy and cumbersome to read but delivering the data as a KPI will allow the reader to review just the totals. Were that total to require more analysis, then it is easy to drill down into more detail.

Conclusion

There is a mountain of data stored in your legal billing software. The secret is knowing what to use and how to use it. What has been covered in this blog is just a small sample of some of the ways you can use and present that information. Many of these KPIs work well together while others are more useful on their own.

Preparing useful data is a collaborative exercise. The information provided to stakeholders has to be meaningful to them or they will ignore it. My next blog will tackle the list of KPIs in the “Operational” group. If you would like any additional information, please click here.

About Rob McKay

Rob McKay, CLM serves as Product Manager at Coyote Analytics, where he focuses on helping the company’s developers design new and innovative additions to our software applications.  Rob previously spent more than 25 years managing law firms in Florida and Texas. He can be reached at rob.mckay@coyoteanalytics.com.

About Coyote Analytics

Coyote Analytics offers a complete financial software system (time, billing, accounting) as well as a full practice management solution (calendar, docketing, document management, forms, contacts) to assist firms in managing the business of law. Coyote Analytics’ program was built through a collaborative effort with clients. It offers a simple, easy-to-navigate interface, a robust feature set, and great customer service, all at a reasonable price point.