For those who enjoy the TV show Dragons’ Den, you’ll know that the quickest way to lose a dragon’s interest is not to know your numbers. It is followed by those dreaded words “I’m out”. It always amazes me when budding entrepreneurs either haven’t prepared for the inevitable grilling on the financials or simply don’t understand the numbers in their business model. I suspect that there are parallels with solicitors generally, and new entrants into the profession in particular.
There are currently many successful practices out there, and additionally we are going through a busy period in many practice areas with profitability for many not currently an issue. Why then are our numbers important? The best analogy I can think of is that ignoring them is a little like driving a car with no instruments. How do you know when you are speeding, the engine is overheating or the tank needs filled? You can make a guess, but occasionally you will get it wrong, and when you do the consequences can range from the inconvenient to the disastrous.
Check your engine
I often ask students on the Diploma, “What do we do in a law firm?” The answer I am seeking is “We make money.” Not to be callous or cold, but to underline that no business can exist without making profit. The answer might be better put as “We sell hours.” In essence we sell our time and the time of our staff. Often though, when we are busy and making money, we fail to focus on the numbers as “the engine” appears to be running fine.
For some, currently the engine may be beginning to overheat as prolonged levels of high demand are putting strain on practitioners and support staff. If fee earners are operating well outwith their normal levels (and only the numbers will tell you what that is), what measures need to be put in place to protect the engine of the firm? The answer too often is simply to work harder still, but at what cost to the business, as the risk of errors increases, and to the individuals as their health may suffer?
At other times business levels are not satisfactory and profit levels down. How, though, do you drive business forward efficiently if you don’t understand the value of a new client to the business? In simple terms the value is the profit we make, simply put being the likely fee less the real cost of providing your service, i.e. the actual number of hours used along with a fair share of the fixed costs. Once you know that number, this will guide you on how much it would be worth investing in marketing to acquire these new clients either externally or from within your own client bank.
Where to harvest?
One final thought: without knowing these numbers, how will you know where the sweet spots are and where the deadwood is? What areas of work should you focus your attention on to reap the low hanging fruits? Likewise, which areas of work just don’t make financial sense to keep providing in their current form? Knowing this in turn might allow you to change how you deliver or acquire that work, or simply to decline it. Even if you believe it’s a “necessary” loss leader (and I’m unaware of any), you will at least know how much you are losing.
Once you know your numbers and act on them you’ll be amazed at how clients, staff and potential business purchasers will greet you with the words, “I’m in!”
Stephen Vallance works with HM Connect, the referral and support network operated by Harper Macleod
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