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What You Can Measure, You Can Manage

Published on Sep 06, 2022
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It requires work and forethought to optimize operations at a plaintiff law firm. But, once you’ve put in the effort, you’ll likely enjoy positive results. You’ll find yourself with a great team in place, climbing conversion rates, and departments firing on all cylinders. It’s at this point in the journey that many firm owners start wondering: Now what? What are the financial implications of operations optimization efforts?

Here’s the reality…

The financial management part of your business is not always fun. I’ve noticed in many firms I’ve worked with, the owners either have an information overload or deficit, with very little in between. Either option is not desirable. It shouldn’t be so complicated and unpleasant to assess the financial health of your firm. Oftentimes, five data points are as good or better than thirty data points! Plenty of business owners measure profitability purely by cash in the bank. While having cash on hand is important, like close to oxygen important, there are other financial components to consider, such as your balance sheet, profit and loss statement, cash flow statement, ratios, liquidity, and tax planning. We believe these few concise reports can help you focus on what’s important and identify key trends. In this blog, we’ll introduce you to some of these reports and outline how important they can be to your organization’s financial health.

Balance sheet and profit and loss statement

I’m sure all of you have seen your firm’s balance sheet and profit and loss statement. This has to be generated at least once a year in order to prepare your tax return, but it’s important for you to look at them monthly or, at the very least, quarterly. It’s also equally important that the categories listed on the statements are useful to you and not just your CPA. For example:

  • Separate attorney compensation from non-attorney compensation.
  • Departmentalize your financials by case type or location so you can track profit centers.
  • Summarize your overhead expenses in a few categories, and compare those totals to a budget.

Cash flow statement

An often dismissed financial statement is the cash flow statement. Don’t knock it ‘til you try it! This powerful tool tells you where your money went over a period of time. While the income statement tells you if you are profitable (or not), it doesn’t measure the cash outflow for case costs (if treated properly), equipment purchases, or debt service, nor does it measure the cash inflow from recovered case costs. A cash flow statement starts with your beginning cash balance, shows you all of the sources and uses of your cash and reconciles to an ending cash balance.

Budget to actual expenses analysis

My favorite financial measurement tool is a comparison of budget to actual expenses. By budget, I don’t mean “you overspent on office supplies by $50.” A budget should be used as a tool for planning at the beginning of the year. When developing your budget, ask questions like:

  • Do you need to hire any new team members?
  • Does the firm have any upcoming large expenditures, like software or outsourcing?
  • Does your pipeline of cases look like it can handle all of your upcoming cash outflows for the year?
  • Have you accounted for traditionally lean months if your settlements tend to ebb and flow?

A budget-to-actual comparison can help you see if what you thought would happen in your firm is actually happening. With this information, you can pivot quickly if needed. These reports can help your firm’s overall financial health and help you make better, more informed business decisions. But, we understand a lot of firms just don’t have the time, talent, and know-how to pull and analyze regular financial data. That’s why we’ve developed a brand-new service for plaintiff law firms.

Introducing Vista’s Fractional CFO Services

Our financial acumen and perspective on the plaintiff law industry allow us to partner and strategize with you on your firm’s financial health and business structure. Our team will analyze, recommend, communicate, and provide financial leadership. Vista’s Fractional CFO Services focus on the business and financial side of your firm, so you can focus on practicing law. We work with you throughout the year to address financial, accounting, and tax requirements with a specific emphasis on the unique needs of plaintiff law firms.

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