If you invest a dollar into your law firm, what do you expect to get back?
Why is the answer to this question so important? It helps you decide what initiatives to pursue and what initiatives to cut. It also tells you whether you are building the right financial opportunity for yourself and your partners. If you are only getting a dollar out for every dollar you put in, you’d be better off keeping that dollar. If this is the case, it’s time to rethink the firm’s strategy and take a closer look at the financial “leaks” in the business.
Let’s say your firm is doing well. For every dollar you put in, you get $1.50 out a year later. If this is the case, it makes sense that you would want to “find” every dollar you could to invest in the firm. The more dollars in January, the more $1.50s in December. Of course, you could take out a loan or raise money from the partners, but those paths involve other undesirable baggage. Let’s look at some alternative ways to find money in your firm to invest.
Below are three strategies you can use to invest more dollars in your firm without doing more legal work, increasing your prices or taking on debt:
Improve the firm’s collection rate. Collection rate is the ratio between the amount collected and the amount billed. A typical collection rate for law firms is around 80%. In our scenario above where the firm achieves a 1.5x ROI on its investments, taking the firm from a collection rate of 80% to a collection rate of 90% generates an additional $.13 for every dollar of revenue the firm had previously. If revenue was $1m before the improved collection rate, the firm would have an additional $130k per year to invest. Given our return on investment, each $130k would turn into $195k at the end of the year (1.5x $130k).
Wait longer to pay vendors. We’re not suggesting you do anything nasty, but there’s no harm in asking your vendors if you can increase your payment terms. For example, let’s say you have a $1k monthly bill that you pay in thirty days on average. If you can extend the terms to sixty days, you’ll have another $1k in the bank to invest in your firm. That $1k then turns into $1,500 at the end of the year.
Get paid faster. If on average the firm takes sixty days to get paid, with $1m in annual revenue that means there are two months of revenue outstanding or $167k on average. By improving the firm’s collection and billing processes, let’s say you cut the time to get paid in half to thirty days. That’s $83k more in the bank to invest. This then turns into $125k at the end of the year (1.5x $83k).
In the example above, we “found” an additional $214k to invest in our firm, and because we knew that we typically generate a 1.5x return in one year’s time, we can expect that $214k to turn into $321k at the end of the year. Without knowing what you get out of your firm for every dollar you put in, it’s much harder to decide what to do with that money.
In this article we picked numbers that were easy to calculate, but in reality the ROI may fluctuate depending on how much you invest. For example, maybe you get a 1.5x return at your current level of investment, but when you start putting in significantly more money, the firm becomes less efficient (the new employee doesn’t get up to speed as quickly as you’d hoped), and you only get 1.3x. Keeping an eye on what you get from your investments will help inform major decisions and may even inspire you to take steps like the ones we mentioned in this article to run a more financially efficient firm.
Gravity Legal is designed to help law firms improve collection rates and speed up the time it takes to get paid. From reducing friction in the client payment experience to providing same day and next day deposits, Gravity Legal helps your firm optimize the collections process.
Curious to learn more? Grab some time with our team at the link below. If we can’t help your firm, we will be the first to tell you.