Pricing & Profitability Richard Smith Pricing & Profitability Richard Smith

Law Firm Financial Metrics

Understanding key financial metrics helps professionals make better business development decisions. Explore 15 essential measures that influence profitability, growth and firm performance.

An understanding of your firm's financial metrics is a proven way to increase revenue and profitability. And why would it not: If you know how your firm is making its money and profit, then you're better placed to make sure you contribute to this conversation.

Yet, BigHand's 'Trends Analysis for Legal Pricing and Budgeting' publication recently reported that:

Although almost three quarters of firms are providing key financial metrics to associates relating to their matters, only 33% have dedicated training programs in place for them, leading to the question – are associates able to action the financial insights effectively?

A very fair question to ask.

What's the use of having data if you have no idea how to interpret it.

So for this BD Tips Wednesday I thought I would provide a cheat-sheet of 15 Key Financial Metrics for professional services firms, starting off with one we all know well!

  1. Billable Hours: The number of hours that need to be billed in a financial year.

  2. Average Billable Rate per Hour: The average billing rate per hour across the firm.

  3. Average Billable Rate (ABR) for a fee earner: The average billing rate for an individual fee earner over a financial year. This is also known as the True Market Rate or True Market Value.

  4. Utilization Rate: The percentage of time spent on billable work versus total available working hours.

  5. Realization Rate: The percentage of billable hours that are actually billed to clients.

  6. Lock-Up Days: The time it takes to convert work in progress (WIP) and receivables into cash.

  7. Average Number of Days per File: The average number of days it takes from opening a file to closing a file.

  8. Average Number of Files Opened each Month: The average number of files opened a month. This is an important metric because if the number declines you have a forward looking view to possible revenue problems and a need to seek BD support quickly.

  9. Average value per file: The average amount you are paid per file by a client over a year. This metric is important in tracking where you are on the value chain.

  10. Profit Per Partner (PPP): The average profit earned by each partner in a financial year.

  11. Net Profit Margin: The percentage of revenue that translates into profit.

  12. Debt to Equity Ratio: Total Debt / Total Equity.

  13. Shared costs: The costs of the business that need to be shared among all business units - an example here would be rent.

  14. Average Client Value (ACV): The average revenue generated per client.

  15. Client Acquisition Cost (CAC): The cost of acquiring a new client. (you don't actually hear this one much)

Further Reading

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