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Profitability analysis: What’s in it for your firm?

In order to succeed in today’s legal marketplace, law firms can’t rely solely on the information presented through a single income statement to advance their bottom line. Instead, firm management must take a comprehensive look at the multiple components that account for the firm’s overall revenue generation. Incorporating a thorough profitability analysis into your law firm’s end-of-year to-do list is essential in driving the business of your practice forward.

TechTarget defines profitability analysis as “a component of enterprise resource planning (ERP) that allows administrators to forecast the profitability of a proposal or optimize the profitability of an existing project.” What this means for the legal industry is identifying all streams of revenue for the firm, assessing the indirect and direct costs for each stream, and comparing those costs to the revenue each brings into the practice. This includes the specific areas of law in which services are provided, departments, office locations, clients and/or matters, individual attorneys, paralegals and other support staff. Having a clear picture of what all firm constituents generate in profit provides practice management with key information to make more informed decisions that will enhance the firm’s operational efficiencies, forecast revenue for the upcoming year, and the ability to identify new growth opportunities and any potential threats for revenue loss.

A fundamental component of profitability analysis and one of the best ways to increase revenue is to assess your firm’s current resource structure and make any adjustments necessary to support operational goals. Thoughtful resource allocation occurs when practice leaders are knowledgeable of all variables contributing to the firm’s profitability. For example, throughout the analysis, management may discover that one area of law is bringing in six times as much revenue as another area; however, both are assigned the exact same number of paralegals and various support staff. This information will cue leadership to rethink the current resource allocation and to restructure them in a way that provides added support to the most profitable areas of the firm, ultimately driving revenue for the practice.

The execution of a comprehensive profitability analysis for your firm is also helpful in answering questions related to ‘next steps.’ Once practice management is aware of the exact dollar amount generated by each of the firm’s constituents – in addition to the direct and indirect costs associated with each – they can begin to forecast profitability for the impending fiscal year. This allows for proper budgeting, as well as the ability for firm leadership to identify new opportunities for growth.

Conducting a thorough profitability analysis can be both tedious and time-consuming, especially for larger law firms. The Rippe & Kingston Legal Management System (LMS) takes the headache out of the process and gives your firm’s leaders, attorneys and staff the time to focus on higher-value work for their clients. Eliminate downtime and ensure the accuracy of your analysis for smart planning by contacting a Rippe & Kingston expert today to set your firm up for a profitable new year.