Learn about the important numbers solo lawyers must continuously review, and ways to use them to make your law firm more profitable.
Of the 1.3 million licensed lawyers in 2015, almost one million are in private practice. Of these, just under half a million were solo practitioners. Establishing a solo law practice requires paying attention to certain economic realities so you can manage costs and revenues and operate profitably.
The initial calculations you should make are simple, but don’t let their simplicity detract from their importance. Look at the numbers, even if it is painful viewing, or else you might find yourself reluctantly exploring other career possibilities this time next year. Your law practice should be more than self-employment: It should be a thriving business.
By paying attentions to these basic numbers, you will lay the foundation for success and avoid mistakes that can sink your law practice.
Start with Understanding Your Law Firm Expenses
First, some context. If you are a solo attorney with no employees, working from home and using a virtual office, you can run your practice for less than $700 per month. That represents about 10 percent of the average revenue for solo practitioners nationally.
Calculating your break-even costs is fundamental, but first, you need to calculate your overhead. It should take about 45% of your revenue to pay for the expenses of running your law office (the overhead). If you can reduce overhead without compromising on quality, even better.Calculating your firm's break-even costs is fundamental, but first, you need to calculate your overhead Click To Tweet
An associate in a law firm will bill 2,000 hours per year at minimum. Though you may work more total hours as a solo practitioner, you will only work on average about 1,200 billable hours per year, because you will be spending more time reading journals, networking, doing administrative tasks and marketing.
An easy way to estimate the break-even costs for your solo law firm is to divide your overhead figure by 1,200 hours per year. This tells you the hourly yield required to generate income. Say you calculate overhead at roughly $36,000 annually ($3,000 monthly). That means you have to charge an hourly rate of $30 per hour ($36,000 ÷ 1200 hours) to break even.
Take Steps to Make Cash Flow Smooth Rather Than Lumpy
Cash that “flows” in fits and starts can cause major problems, but it is something the solo practitioner must plan for. You are expected to pay your bills on time, and you want to believe your clients will not wait until the last minute to pay you. However, they will. The result can be you paying bills with crossed fingers, hoping customer remittances arrive by the time your vendor or provider cashes your check.
Ideally, having enough money to cover expenses for at least six months should be adequate protection against the problems of lumpy cash flow, but there are additional things you can do. Getting bills out immediately after services are rendered, offering discounts for early payments (say, within ten rather than 30 days), and offering multiple payment options for clients (like online payments and credit card payments) can improve and steady your cash flow.
You Can Only Save So Much, but Earning Has Fewer Limits
It makes sense to reduce expenses where you can, but beyond a certain point, you cannot keep cutting without impairing your ability to accomplish things. Fortunately, there are fewer limitations when it comes to increasing your earnings.
Therefore, always keep an eye on growth. Maybe that means working more hours or taking court-appointed cases (as long as they are not excessively time-consuming). Seminars, eBooks, or tutoring are other possibilities. The point is, there’s nothing wrong with a solo practitioner having a side hustle if it gives you peace of mind and keeps the lights on.
Your Solo Law Firm Is a Business Asset: Treat It
For most solo practitioners, the solo law firm is more than a vehicle for self-employment. It is a business asset. Suppose you have done everything “right” and set yourself a monthly income goal that makes sense, cut unnecessary expenses, and still have money left over. Figuring out what to do with it requires you to look at spending that generates a return. That “return” may be more clients due to a better location, or it might be more referrals from other lawyers.
Reinvest revenue into your practice with an eye toward return on assets, so your law practice will reliably bring in more money than you are putting into it. If you have money to spend, take the time to at least ballpark the costs of opportunities you hope to have. Keep a rein on expenses, try to promote steady cash flow, and you will cope successfully with the economic realities of being a solo law practitioner.