A Debt-Free Firm: Lessons Learned from the Winter Olympics

Published February 25, 2014

Forty billion dollars. That is the amount by which Russia exceeded its planned expenditures on the Winter Olympics in Sochi. Russia had predicted costs of $12 billion; by the start of the Olympics, that number ballooned to $51 billion. And some news media reported many substandard aspects to the event!

Regardless, the important takeaway here is that it is much easier to exceed a budget than it is to win a gold medal. Clearly, spending more than one has is something that every lawyer should strenuously avoid.

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 that all indicators (in this case, of financial performance) are positive.

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: profitability, realization, and cash flow. Financial benchmarking focuses on profitability. The key to any firm’s profitability is integrating how many hours you bill with how much money you collect. The goal is to have a high collected-to-billable ratio, well over 90 percent. A rolling twelve-month statement of cash receipts and payments will highlight delinquents so that you can move quickly to collect overdue accounts.

Keep careful track of these key metrics, and you won’t find yourself sliding uncontrollably down the slippery slopes of the Winter Olympics.

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Audience type: Administrators, Associates, Large Law Firms, Small Law Firms, Sole Practitioners