Employee Profitability Report

Building a profitable firm should be a priority for all leaders, irrespective of the size of the firm they are leading. Profitability is not about just billing more hours, it’s about insights about your firm and understanding your customers, your fee structure and expenses. 

As a leader of your organization, you may have to modify your flat fee pricing after analysing your past matters.

• • Which type of matters did you consistently spend more hours than expected?

  • Which matters did you consistently stay under?

  • Which employee(s) end up going over budget?

For Billable matters –

• • How much do you write-down each month?

  • Which practice area has the most write-downs?

  • Which employee do you write-down the most?

There are many benefits into this kind of insights. One benefit is that really looking at your customer pricing can help align your goals with people within the organization. Firms that tie employee compensation based on profitability are more successful in the long run and are able to build a growth-based culture and that can have a lasting impact.

Another benefit of customer profitability insight is that it can show you which practice area you should focus your marketing dollars to get higher ROI on your spend.

Operations is another area that helps increase profitability. Based on our experience in talking to hundreds of firms, we have often found that operationally focused firms are more profitable than their peers.

In the upcoming blog we will talk in more details about how improving operations can have a direct impact on your profitability.

Firm Profitability

A firm’s profitability can be measured by the revenue earned over the costs incurred in the running of the firm.

Profitability is a metric used to determine a law firm’s profit and is a measurement of efficiency. It also is a firm’s capability to produce return on investment from various operational costs such as salaries. Operational costs, fixed and variable expenses etc.

Finance Determiners of a Law Firm

To understand and determine if a firm is successful, you must look at costs, revenues, and profits. Costs and revenues must be balanced effectively by a firm to be successful.

The goal of any law firm business is to earn profit and attract more clients. These two factors determine the survival of a business in a competitive marketplace. 

Every law firm has the responsibility to manage finance accurately and come up with a sufficient budget. But it also needs a thorough understanding of both revenue and profit.

What Is Revenue?

Revenue is the proceeds from various business activities such as the sale of services. Revenue appears on the top line of a firm’s income statement.

Operational and non-operational revenue help the law firm to run effectively and efficiently. Operational revenue is obtained from the sale of goods and delivery of services.

Non-operational revenue is the proceeds generated from other business activities undertaken side by side from the core activities such as the sale of an asset.

What Is Profit?

Profit is the excess left after deducting operational costs, taxes, and associate expenses. It is the financial gain for a business or a company.

Profit is further divided into gross profit, operational profit, and net profit. Gross profit refers to the amount remaining after deducting all the costs related to the production of output or service delivery.

Operational profit is the remaining amount after deducting operating expenses. These are expenses incurred after undertaking normal business operations.

Let us now see what fixed and variable costs are and how could one determine these to increase the profits of a law firm

As fixed and variable costs make up the cost structure of your firm, understanding the fluctuation of expenses and how they tie into your sales volume can help you make sound business decisions that will ultimately drive profits.

Fixed costs and variable costs are two main types of costs a firm can incur when delivering services. Firms use fixed costs for expenses that remain constant for a specific period, such as office rent or loan payments, salaries etc., while variable costs are for expenses that change constantly, such as taxes, staff, and other operational expenses like electricity, office expenses, third party IT, Marketing, Social Media advertisements, business development expenses.

What exactly is Employee Profitability?

Employee profitability also referred to as net income attorney is the measure used to calculate your firm’s net income divided by the total number of attorneys. In other words, it signifies how much profit each of your attorneys bring in over a given period of time. In a manner, higher the net income per employee / attorney, higher is the efficiency of a law firm.

There are various factors affecting employee profitability.

As the attorneys vary drastically within the industry and within the law firms, employee profitability varies from one law firm to the other. Every attorney’s turnover can have a dramatic effect on the firm’s net income. Turnover requires your firm to interview, hire and train new entrants. The age of the firm can also influence profit per employee. Younger firms tend to have low revenues and profits, particularly in very early stages, which means that their net income per employee ratio is likely to be smaller than that of an older firm.

How to calculate Employee Profitability –

Here’s a simple formula you can use to calculate the profit per employee –

Profit Per Employee = Net Profit / Full-Time Equivalent Employees

Before completing the profit per employee calculation, you’ll need to know your firm’s net profit, as well as the total number of full-time equivalent employees on your books.

How to visualize employee profitability?

A firm’s profit per employee is calculated by identifying the revenue generated by every attorney minus sum of all the costs (fixed and variable) associated with the firm Individual attorney’s revenue is the collected amount for activities done for the matters The cost per attorney is sum of all the costs divided by no. of attorneys/employees in the law firm.

Compare your attorney’s performance and analyse the profit generated by them towards the firm over the year to understand the return on talent.

LawKPIs ‘Profitability by Attorney’ report helps in analyzing firm’s profit by each attorney. To toggle between the chart and tabular data of any attorney and to view the profits thereby earned, becomes so handy for the lawyers with the Profitability dashboard in LawKPIs reporting solution.

Just as how you access the Profitability by Month data by applying filters, similarly, get any data for the year of your choice along with the month and the name of the attorney, respectively. A clear detailed Profitability by Attorney data is right at your finger tip. Reset the data and return to dashboard to get back to the original data.

We help attorneys who are or were spending long hours in the office, often sacrificing personal and family life., but without a decent return in billable hours. LawKPIs ‘Profitability by Attorney’ report helps in calculating profits the firm is making from each attorney.

Firm owners can identify the attorneys with low profit and try to find out the root cause for their inefficiency which has resulted in lesser profit or sometimes loss This KPI gives firm owners the insight of top performing attorneys and can take the measure of adding performance-based pay for low performing attorneys.

Summary –

In general, the employee profitability metrics provide a clearer picture of the firm’s variables such as profit margins, income by an attorney, annual revenue, direct costs, number of clients or cases per year, and so forth. Thus, such figures are essential for proper business planning, reporting, and even abiding with the overheads and expenses.

Start tracking your Employee Profitability using LawKPIs, a fully automated reporting solution for Clio and QuickBooks. Monitor your firm’s key metrics using LawKPIs.

Many law firms share resources, for example a paralegal or an admin staff is shared by multiple attorneys. So how do you split the cost of those employee to calculate true profitability by attorney? Do you split cost based on percentage of billing or split a fixed percentage every month? To keep it simple one can also use a fixed % for over heads.

At LawKPIs we work with each firm to understand their cost and them build a report that will calculate profitability. Our clients have access to this report on a real time basis and they can even run for prior periods.

LawKPIs is a robust reporting solution fully integrated with Clio and helps you get automated reports based on Clio custom fields. Schedule a demo today!