A Survival Guide for Legal Practice Managers

A Survival Guide for Legal Practice Managers

How do you financially rate your firm?

Tuesday, April 04, 2017

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By Andrew Chen, Partner - Business Advisory, Crowe Horwath


“On a scale of 1 to 10 how would you rate the financial performance of your firm?” 

It is interesting the variety of responses that I receive when I ask partners and firm management this question and then ask them “why?”.

Typically, the responses are given in the context of the current economic conditions the firm is facing, internal issues or a partner’s objectives.

How would the partners of your firm rate the financial performance of the firm? Do some of the following responses sound familiar?

  • We grew revenue by 10% again
  • Partner profits exceeded expectations at $600,000 per partner
  • The firm was valued at $5 million
  • Staff productivity is at 85%
  • Profit per point is on budget
  • Cashflow is great our firm lock-up is now 60 days.
  • We just hired a new a partner and opened a new office in Brisbane

In contrast, for a firm not travelling financially well, the responses typically centred around the firm not meeting budgeted fees, the reasons why and the level of partner profit draws not being quite where they should be.

Understanding how your firm rates financially is important so that you know the true financial picture. This can be achieved by using a composite of measures that highlight the strengths and weaknesses of the firm, but also provides the firm with actionable insight to change its future direction.

Most firms produce monthly and annual financial statements including a Profit and Loss Statement and a Balance Sheet in order to comply with tax and other record keeping requirements. But we tend to analyse them in isolation, and track measures specific to particular balances or reports. While there is nothing wrong with that in itself, it does not show the true picture of a firm’s performance.

It is important to analyse the financial relationship between a profit and loss and balance sheet together to truly know how your firm financially rates.

I have come across a number of similar instances where a partner has said: “The profit per partner was $350,000 and we had a great year, but each partner had provided effectively $800,000 of equity funding to the firm”. In my book, that’s not a particularly good outcome.

Create a firm scorecard



Create a firm scorecard with your firm’s key KPI’s with targets and compare them to benchmarks from the recent ALPMA/Crowe Horwath Financial Performance Benchmarking Study ‘Financially propelling innovation & growth’. From the results summary,you can rate the performance of your firm, and assess if it is above expectations or performs poorly.

1) Gross Profit Margin % (GP)



I was quite surprised at the number of firms that do not budget or report their gross profit margins. This may have something to with how a firm’s accounting system and payroll systems are initially set up, and an acceptance of the reporting produced by these systems.

It is an ideal measure to see how profitable the firms legal service are produced, which then should direct you to whether you can afford those pay rises, increase productivity or change staff mix or simply need to grow fees.

The recent ALPMA/Crowe Horwath Benchmarking study results indicate that the average GP in June 2016 was 57.8% and it has hovered around this percentage for the prior 3 years.

2) Profitability % (before interest and tax)



Everyone looks at the bottom line, but not always before interest and tax. This measures the operating performance of the firm as a return on revenue. It enables your firm to be compared to the performance of other firms regardless of how the firm is funded.

3) Return on the funding capital %



This measure is also commonly known as the return on capital employed. [Profit before Interest & Tax / (Working capital + Non-Current Assets)]

Is the profitability percentage an adequate return for the amount the partners have invested in the firm and the firm has borrowed from the bank? If the answer to this question is no, then this could be a reflection of large work in progress and debtor balances, low gross profit or excessive overhead costs.

This measure provides your firm visibility on whether the partners are leaving excessive profits in the firm; bank debt is growing due to poor working capital management of WIP and debtors; or whether there is a committed investment for growth.

4) Revenue generated on funding capital % (Financial Resilience Index)



We see this measure as an indicator of a firm’s financial resilience and how effectively the firm is able to grow fee revenue off the back of the funding from the bank and the partners. That is the firm’s ability to support fee growth with no extra funds from the bank or profits left in the firm by the partners. On average, firms in the ALPMA/Crowe Horwath study generated for $2.7 of fee revenue for every $1 of funding.

Increasing the value of the firm

 

If these four key measures are moving in the right direction year on year, the value of the firm increased which is a reflection that the firm’s strategic plans are working!

Other measures and indicators improved such as lock-up days, partner draws increased, bank debt reduced and overheads were contained.

For participants in the ALPMA/Crowe Horwath study that rated highly in the above four measures relative to their peers, it was no surprise that the results also showed they were being innovative and were also investing in marketing campaigns and new technology.

How does your firm financially rate on these measures?

Editor's Note


2016 Financial Performance Benchmarking Study Results
For further insights, download the results summary from 2016 ALPMA/Crowe Horwath Financial Performance Benchmarking Study of Australian Law Firms, "Financially Propelling Innovation & Growth".













About our Guest Blogger


Andrew ChenAndrew Chen is a Partner of Crowe Horwath’s Business Advisory team and has provided business advisory, taxation and accounting services to a broad range of clients for 25 years.

Andrew helps business owners identify key financial issues affecting their businesses and then develops tailored solutions to make their businesses more profitable and sustainable.

Andrew’s significant experience in advisory and tax accounting services comes from working with businesses of all sizes. He specialises in advising legal and professional service firms on establishing business structures; financial management in areas of internal accounting functions and tax administration; financial reporting and KPI performance measurement; budget and cash flow forecasting; tax planning; salary packaging; and tax return preparation.

Andrew is a regular speaker on financial management and taxation issues at industry events. He was a key speaker for Macquarie Bank’s National Legal Firm roundtables. Andrew lectures at the College of Law and also contributes to industry publications including those for the Australian Legal Practice Management Association and Australian Dental Association.


Characteristics of a profitable firm

Tuesday, March 08, 2016

by Andrew Chen, Partner, Crowe Horwath

This year, law firm participants in the 2015 Financial Performance Benchmarking Study of Australian Law Firms were provided the opportunity  to rank, assess and rate their financial performance against peers using Crowe Horwath’s online proprietary tool, Open Measures. 

The study, which was conducted by Crowe Horwath in conjunction with the Australasian Legal Practice Management Association (ALPMA), demonstrates the way in which law firms can both improve their financial position through revenue growth and ensure a profitable, sustainable future.

Based on the findings, it is apparent that there are several key and comparable characteristics of profitable firms.

Here’s what the top 10 performing firms are doing:

  • Hiring for growth: One in two firms are hiring for growth -not for replacement of staff - being the predominant reason for hiring new full time fee earners across all participants. 

  • Retaining staff: Top performing firms recognise that success is achieved through having the right staff and retaining them.

  • Hourly-based pricing: Top performing firms implemented a pricing method primarily being based on hourly rates, with most intending not to change.

  • Debtor management: Debtor management was exceptional in top performing firms, with debtors over 90+ days accounting for only 17% of total debtors; the average across the study being 30%.

  • Low interest expense: Top performing firms demonstrated low interest expense, with the average in the top 10 being lower than the rest of the firms. 

  • Internal appointments: Five of the 10 top performing firms appointed partners internally, with three of the five appointing female partners. 

Additionally, and moving forward, here’s what profitable firms are looking out for: 

  • Talented lawyers to attract and retain.

  • Marketing opportunities through social media.

  • Under-performing fee earners.

  • Having excess office space.

The results of the study also revealed that of the top 10 most profitable firms, six held a traditional partnership structure, while the remaining four were incorporated. 

Recurring participants of the study will be able to visually track how they rank against the most profitable firms and how they have improved over the years, proving to be an invaluable tool to examine trends and revise their business strategy for future financial success. 


Editor's Note:


For further insight into the characteristics of profitable law firms and how they may apply to you, download the results summary from 2015 ALPMA/Crowe Horwath Financial Performance Benchmarking Study of Australian Law Firms. 

ALPMA members and research participants are invited to attend the results webinar "Anticipate your Financial Tomorrow" on Thursday March 10 at 1pm AEDT for free. Register here.

About our Guest Blogger



Andrew Chen leads Crowe Horwath’s Professional Practice Advisory team and has significant experience providing advisory and tax accounting services to businesses of all sizes. 

He specialises in advising legal and professional service firms on establishing business structures, financial management in areas of internal accounting, tax administration, financial reporting and KPI performance measurement; budget and cash flow forecasting; tax planning; salary packaging and preparing tax returns.














Avoiding the real disrupter and finding your ideal financial shape

Tuesday, December 01, 2015

By Andrew Chen, Partner at Crowe Horwath

The buzz word doing the rounds of law firm management meetings at the moment is ‘disruption’.  We are regularly seeing this word slapped across the front page of our top industry publications, touting that the age of disruption is upon us and that firms need to find new ways of innovating to be competitive in the market. 

Frequently highlighting the threat of technology in the industry, a common thread that is often left out of the disruption weave, is the financial disruption staring up from P&L’s and balance sheets. It is these financial disruptions that are determining firm’s long term financial shape and their ability to innovate.

With start-up costs at an all-time low, the market is blossoming with a wave of firms each introducing a new financial shape to the industry. We are seeing new go-to-market strategies; different operating models and exclusive client experiences. From an accountant’s perspective, the increase in competition and disruption to the ‘norm’ has meant that the ideal financial shape is being redefined, and firms are being forced to adapt or get left behind.

Lending to the low barriers of entry, we are also seeing a changing landscape in which new entrants are redefining the traditional shape of law firms. Small boutique firms are now a common landmark in the legal industry. Many of these non-traditional firms are experiencing huge growth levels and quick financial maturity within two to five years of operation. These success rates are disrupting the traditional financial rules of thumb previously associated with the industry.

Similarly, an increase in mergers of firms, lateral movement of Partners and a trend towards a more varied suite of firm structures (e.g. incorporation and new partnership models) is a product of the changing financial landscape of the industry. As accountants, we are seeing that these factors are majorly disrupting financial competitiveness and sustainability and in turn resulting in a new ideal financial shape.

Finding your law firm's ideal financial shape

So that leaves us asking the question; "how can your firm find its ideal financial shape and avoid the real disruption?"

To get started, you need to understand what shape your firm is currently in. There are seven key financial metrics that can aid in revealing financial shape and pinpointing opportunities for competitive advantage:

  1. Revenue per partner
  2. Gross margin
  3. Net profit before funding costs (interest) and income tax
  4. Work In Progress (WIP) lock up days
  5. Debtors lock up days
  6. Working capital absorption 
  7. Financial resilience rating.
You then need to understand how your firm is performing compared to similar firms.  Participating in financial benchmarking studies specific to the legal industry will help your firm understand how it is performing on these key measures and benchmark your performance to similar firms - giving you an understanding of your relative strengths and weaknesses.  

From these insights, you can then develop strategies to achieve your firm's ideal financial shape. 

Editor's Note

Over the last four years, the ALPMA/Crowe Horwath Financial Performance Benchmarking study has seen the financial metrics of over 100 law firms respond to the financial disruptors in the industry. 

The survey has helped firms identify trends and develop strategies to address them, and in turn, assisted firms in finding their ideal financial shape. 

The 2015 study is now open to all Australian law firms and participation is free.  

But hurry - the survey closes on 15 December.



 About out Guest Blogger



Andrew Chen leads Crowe Horwath’s Professional Practice Advisory team and has significant experience providing advisory and tax accounting services to businesses of all sizes.

He specialises in advising legal and professional service firms on establishing business structures, financial management in areas of internal accounting, tax administration, financial reporting and KPI performance measurement; budget and cash flow forecasting; tax planning; salary packaging and preparing tax returns.


Are you ready for a competitive 2015? Profitable law firms investing for growth

Tuesday, February 24, 2015

By Andrew Barnes, ALPMA President & Financial Controller, The Lantern Legal Group


ALPMA and Crowe Howarth recently released the results summary of our annual Financial Performance Benchmarking Study of Australian Law Firms  – and I wanted to share with you my thoughts on the key findings, summarised in the infographic at the end of this post.


1.  Firm profitability continues to rise thanks to strong cost control


While average revenue per partner fell by nearly 6% for most firms in 2014, the successful pursuit of leaner operations significantly increased gross profitability.   

According to the study, the average profitability of law firms increased to 15% in 2014 compared to 10% in 2013, while gross profitability is up to 58%, compared to 55% in 2013.

Unlike previous years, when firms looked inwards and concentrated on cost cutting right across the board, firms are becoming more targeted in their cost reduction strategies.  Average overhead costs (excluding rent) reduced to 36% as a percentage of revenue, compared to 40% in 2013.  Average lock-up days (time taken to complete matters, invoice and collect fees from the client) reduced from 147 days last to 141 days. This indicates an improvement in internal processes for collecting cash and is a positive for firms’ cash flow.

The study’s Financial Resilience Index, which measures how efficient the generation of revenue is from the capital employed by the firm, also increased to 2.69, compared to 2.23 last year, showing an increase in financial resilience of more than 20%. 


2.  Growth is firmly on the agenda 



Firms are starting to shift their focus from cost savings to revenue growth – there’s really only so far you can cut costs before you start hitting bone.

Growth firmly on the agenda, with firms that participated in this year’s study intending to increase revenue in 2015 by an average of 10%, with larger firms indicating growth over 20%.

3.  Investment in business development and lateral hires



Australian law firms are starting to shift their focus from cost savings to revenue growth – as there’s really only so far you can cut costs before you start hitting bone.

They are opening their purse strings to invest in areas of business they believe will facilitate growth 

Firms are planning a greater investment in marketing and business development activities and focusing on lateral recruitment in order to be competitive moving forward.

4.  Firms transitioning from the billable hour



For the first time this year, the survey also sought to measure the basis of client billing amongst respondent firms, with the majority of firms' revenue (70%) still use the billable hour as their predominant billing measure.

What is noteworthy is that 30% of respondents advised that they use a method other than billable hours, such as fixed or value pricing.  I expect this number will increase over time as clients continue to demand value from their legal spend and firms either reinvent the way they practice or mimic the way their competitors do.


5.  Execution of strategies is key to success



Firms who succeed will be those who can execute their strategies, maintain a lean cost base and, importantly, retain key staff.

Has your firm been building its business development and marketing capability and managing staff engagement over the last 18 months or so?

If so, you will be well-positioned to manage in what is shaping up to be a very competitive market in 2015.

Readers  interested in learning more about the overall results of the study can download the ALPMA/Crowe Horwath Financial Performance Benchmarking Report Summary.  


Results Infographic
























































About our Guest Blogger


Andrew Barnes, ALPMA President

Andrew Barnes is the President of the Australasian Legal Practice Management Association (ALPMA) and the Financial Controller of the Lantern Legal Group, which incorporates the practices of Harwood Andrews and Sladen Legal.  

He has worked in the legal sector for many years and is a passionate advocate of 'letting law firm managers manage' and the Geelong Football Club.







Editor’s Note:


Anticipating your financial future? – Five key questions you need to ask

Tuesday, December 30, 2014

by Andrew Chen, Partner – Professional Practice Advisory, Crowe Horwath

If you could have all the answers about your financial future, what questions would you like to ask? 

What do you wish you knew but maybe just don’t have the time to find out? It can often be intimidating realising what you don’t know about your firm. But…finding answers to all of your queries and concerns will lead to a stronger practice! 

The financial future of your firm should always be on the forefront of your mind. The success and growth of any legal practice is built on anticipating the needs of the business and keeping your financial goals in mind. It is very easy to become complacent during good times, but a great law firm should always be looking forward, anticipating your financial future and putting processes in place to ensure that you’re on track. 

The good news is that the outcome of your firm’s financial future is yours to determine, as everything that you do today, will have an effect on your tomorrow. You don’t just have to accept your current results, by improving your processes today, you can make your desired outcomes for tomorrow a reality. 

To help out, we have brainstormed our five key questions that you should be asking about your firm:

  1. What are the implications of the decisions you make today having on the financial future of your practice tomorrow?

  2. Are you maximising your business’s profits? Do you think your business should be more profitable and how would you go about increasing those profits?

  3. Are your financial management techniques helping you achieve the right outcomes and do you have the right data and information to achieve them?

  4. Do you have a strategy in place to grow your practice in 2015 and if so, what is your target growth?

  5. Is there a more simple way to ensure that you understand your financial future? 
While it is impossible to predict the future and have all the answers, the ALPMA benchmarking study could help you find the information that you may be looking for. We want to give you the best data to help you make the right choices for your firm’s financial future.

Changing the future 

In the absence of a crystal ball - are you making the right decisions to have the information you will need to anticipate where your firm will end up financially? 

How will you know what the result of your time and efforts?


Editor's Note:

If you want to gain a valuable insight into your firm's true 'financial' ability and explore the areas where you need to focus on and change, you can participate for free in the 2014/2015 ALPMA/Crowe Horwath Australian Legal Industry Financial Performance Benchmarking Study. The study closes at 5pm on 5 January, 2015.

The study reviews eight key measures including profitability, returns, working capital and revenues, and provides an excellent opportunity to get an objective view as to your firm's financial performance and how this compares to your peers. 

About our Guest Blogger

Andrew Chen
Andrew Chen leads Crowe Horwath’s Professional Practice Advisory team and has significant experience providing advisory and tax accounting services to businesses of all sizes. 

He specialises in advising legal and professional service firms on establishing business structures, financial management in areas of internal accounting, tax administration; financial reporting and KPI performance measurement; budget and cash flow forecasting; tax planning salary packaging and preparing of tax returns.




Anticipating your financial future. Are you in the dark?

Tuesday, November 18, 2014

by Andrew Chen, Partner – Professional Practice Advisory, Crowe Horwath

How many new clients can your firm take on before you run into financial stress? How many more new staff would you need to hire to meet your new demands? What would be the result of increasing your fees by 15%? In the absence of a crystal ball, how and at what point will you know?

In the legal industry there are common misconceptions around growth and cash flow. If your firm grows its client base by say 10%, the problem is cash flow will not necessarily increase by 10%...

A Case Study

Three years ago a mid-tier Australian law firm spontaneously decided to hire a new Partner and bring in 8 new high-fee clients. Very quickly, the new Partner needed to hire four new members of his staff to fulfill the needs of these clients. 

Having not budgeted for this, and with an overdrawn bank account, the Partners were forced to make payment arrangements from the ATO and Partner drawings were cut.

What steps could this firm have taken to mitigate this risk? 

In recent years, a similar sized firm participated in an annual financial performance benchmarking study. Once the firm received the analysed results, the management team presented them at a partners’ strategy session. 

When reviewing the benchmarking data, they were able to better understand their true position. The results revealed that when they compared their working capital to that of their peers, they had significant amounts of cash tied in work in progress (WIP) and debtors. They had no idea that their WIP was so large and were unaware of the impact this was having on cash flow. 

They were forced to reassess their strategic objectives and the decision was made to focus on optimising cash flow and general profitability. By re-defining the key focus areas, the firm was able to generate cash, a process which involved reviewing operations and staff processes to ensure they were gaining the best out from their resources. Partner drawings were, in fact, able to be increased (not cut). 

They were able to anticipate where the firm was going to end up financially.

After 12 months, the firm participated in the benchmarking study once again. They were able to track their progress and re-determine their strategic measures for success. The partners were able to see a direct correlation in the operational improvements within the firm – this proof of improvements in efficiency allowed the firm to get more out of less, demonstrating that profit is not always the bottom line. 

Changing the future 

Are you making the right decisions to have the information you will need to anticipate where your firm will end up financially? 

How will you track the results of your time and efforts?

In the absence of a crystal ball, benchmarking your financial performance can guide you to make better decisions for the future of your firm.  

Editor's Note:

Law Firm Financial Performance Benchmarking Study
Australian firms interested in benchmarking their financial performance to similar practices, are invited to participate for free in the 2014/2015 ALPMA Financial Performance Benchmarking Study, currently being conducted in partnership with Crowe Horwath. The study closes at 5pm on 5 January, 2015.

The study reviews eight key measures including profitability, returns, working capital and revenues, and provides an excellent opportunity to get an objective view as to your firm's financial performance, how this compares to your peers and gain insights to help you anticipate your financial future. 

About our Guest Blogger

Andrew Chen
Andrew Chen leads Crowe Horwath’s Professional Practice Advisory team and has significant experience providing advisory and tax accounting services to businesses of all sizes. 

He specialises in advising legal and professional service firms on establishing business structures, financial management in areas of internal accounting, tax administration; financial reporting and KPI performance measurement; budget and cash flow forecasting; tax planning salary packaging and preparing of tax returns.

Sacrificing Growth Ambitions for Partner Profitability

Tuesday, February 25, 2014

by ALPMA National President, Tony Bleasdale 


The results of the ALPMA/Crowe Horwath Financial Performance Benchmarking Study make interesting reading for all law firm leaders interested in understanding how the 100+ Australian law firms that participated are performing in the current economic climate.

Protecting Partner Profitability

The key takeaway for me is that most law firms have sacrificed their growth ambitions in order to protect partner profitability.

The study shows that average profitability of firms has risen slightly to 9.5 per cent (from 9.4 per cent), but growth forecastsAverage Profitability have dropped an average of 2 per cent, from an average of 11 per cent last year to a more modest 9 per cent this year. 

The rise in partner profitability is despite gross profit margins declining 2.2 per cent across all firms (to an average of 55.3 per cent), representing a 7 per cent decline over the last four years. Competitive pricing, increasing salary costs and a drop in revenue have contributed to pressure on margins. 

According to Andrew Chen, Partner – Professional Practice Advisory at Crowe Horwath, the economic conditions of the past 12 months have led to a contraction in the size of firms across all tiers, particularly at a partner level, and growth outlooks for the remainder of 2014 are also being revised.

“Firms have shrunk to fulfill profitability commitments to partners and they’ve had to make some tough decisions accordingly. Paring back growth forecasts is a natural consequence of this,” he said. 

Larger firms – those with annual revenue in excess of $20 million – have been slower to reset growth expectations year-on-year, with the business models of smaller firms more conducive to repositioning. 

Smaller firms are more nimble and have therefore adjusted quicker. Also, many of these tend to operate under an incorporated model as opposed to a partnership, so retaining profits is helping with the working capital of those smaller firms.

Doing More With Less


The study also shows that significant emphasis is being placed on getting more out of less at law firms, with firms beginning to see that their efforts are paying off. 

Most firms are now managing their cash flow and costs much more effectively. Cash is king in this environment, and the study show firms have improved their working capital management.

As an example, average lock-up days (the time taken to complete matters, invoice and collect fees from the client) reduced, from 155 days to 147 days in this year’s study. Four years ago, the average was 176 days. 

Less Financially Resilient


Firms have actually become less financially resilient, according to the Crowe Horwath Financial Resilience Index (2.23 this year compared to 3.02 last year) - despite the improvements in working capital management . This indicates a reduction in the multiple relating to the revenue generated from available funding resources/ financial investment in firms.

Protecting partner profitability has typically achieved at the expense of revenue growth and this is not a sustainable strategy for firms who want to thrive and prosper in the new legal landscape. 

Moving forward, law firm leaders need to continuously challenge the way things are done, to reward innovation and look for new ways to satisfy increasing client demands and strengthen their competitive position.

Andrew Chen also believes that firms need to critically reassess the financial management and models they operate in. 

“There has been a lot of change in recent times, so reviewing forecasts in line with the operating model and amending where required will be vital to the sustainability of these firms and the health of the sector more broadly.”

Editor's Note:


The ALPMA/Crowe Horwath Financial Performance Benchmarking Study uses Crowe Horwath’s proprietary benchmarking tool, Open Measures, to compare participating Australian law firms. This is the fourth consecutive year the study has been undertaken, with the aim to assess the financial health of legal practices and help firm’s benchmark performance to their peers.  More than 100 firms participated in this year's study.  Download the report summary.  Read the media release.

About Our Guest Blogger


Tony BleasdaleTony Bleasdale is the National President of the Australasian Legal Practice Management Association (ALPMA).  ALPMA is the peak professional association for managers at law firms and legal departments in Australasia.  ALPMA provides an authoritative voice on issues relating to legal practice management.

Tony has worked in the financial and legal industry for almost twenty years, providing guidance in and outside of law firms. He is passionate about improving client experience through engagement. 

Follow him on Twitter @TonyBleasdale.

Understanding why profit isn't the bottom line

Tuesday, January 07, 2014

by Andrew Chen, Partner Business Advisory, Crowe Horwath


A case study


Two years ago a mid-tier Australian law firm participated in the annual ALPMA/Crowe Horwath Australian Legal Industry Financial Performance Benchmarking Study.  Once the firm received the analysed results, the management team presented them at a partners’ strategy session. 

Knowing the budget for the following financial year, the partners had high aspirations for growth – with a specific desire to focus on business development and marketing. 

When reviewing the benchmarking data, they were able to better understand their true position.  The results revealed that when they compared their working capital to that of their peers, they had significant amounts of cash tied in work in progress (WIP) and debtors. 

The reality was that the firm had no further ability to borrow any money from the bank and that there was no direct funding for growth.  If this situation continued, partner drawings would have to be cut. 

They were forced to reassess their strategic objectives and the decision was made to focus on optimising cash flow and general profitability. By re-defining the key focus areas, the firm was able to generate cash, a process which involved reviewing operations and staff processes to ensure they were gaining the best out from their resources. Partner drawings were, in fact, able to be increased (not cut).

After 12 months, the firm participated in the benchmarking study once again. They were able to track their progress and re-determine their strategic measures for success. The partners were able to see a direct correlation in the operational improvements within the firm – this proof of improvements in efficiency allowed the firm to get more out of less, demonstrating that profit is not always the bottom line. 

Getting the most out of your financial data


How well does your firm use its financial data to drive strategic decision making and optimise the performance of the firm?

Like any professional athlete, the first step is to realise what your firm's "personal best" is in terms of financial performance - and then to recognise where you stand relative to your competition.  For law firms – you need to know where you are relative to your peers, as well as industry best practice. 

As financial performance is determined by multiple factors,  your firm needs to identify and define those areas which are most important. Looking beyond the data and analysing cost structures and key factors that are impacting profitability will help your firm achieve its true potential. Firms need to shift the focus from just the outcome (the profit) to encompass the processes and activities that generate the profit. 

The reality is that there is always a vast amount of data – and financial facts and figures are often complex to understand. For some, this may be a little daunting.  That is where participation in a benchmarking study can provide invaluable assistance and the insight needed to guide your firm in the right direction. 

How your firm can adapt to making quick decisions 


Through our years’ of experience in the legal sector, we have seen an emerging trend regarding the key challenges being faced by many legal firms – namely, how and how quickly they respond in a changing economic climate. Making quick decisions, based on inaccurate facts, in an unpredictable market has resulted in some firms becoming overcautious – with subsequent financial consequences. 

Like professional athletes, law firms are trying to avoid injury. By minimising the impact in the short-term, they are losing sight of the long-term strategic objectives. Not only can this affect the financial ability to grow, there is also a risk of reducing long-term profitability which causes your firm to be inhibited from achieving its financial best. Under these conditions, firms need to ensure that long-term decisions are based on the right analysis so that resources are being used as effectively as possible. 

Closing the gap between your competitors


To stay ahead of competitors, lawyers need to be willing to adapt quickly to changes, act strategically and be able to make difficult decisions to ensure they can continue to deliver the best service to clients. This will help build a financially sustainable firm.   Maintaining revenue and profitability is important but you need to consider how to get more out of less to ensure your firm is utilising its financial resources efficiently. 

Benchmarking data can help you identify where your problems are and whether they are related to cost. We can use analysis to identify the gaps. By being informed you can make those tough decisions and work towards setting strategic objectives and closing the gap between you and your competitors.  

Editor's Note


The ALPMA/Crowe Horwarth Financial Performance Benchmarking Study is a free industry benchmarking study, open for participation by all Australian law firms until January 17, 2014.  By participating in the study your firm can:
  • Benchmark your firm's financial fitness in FY13 against the key performance indicators of financial health, including profitability, work in progress days, debtor’s days, interest expense, labour cost, rent, and working capital.
  • Interactively compare your firm's performance against the results from similar firms using a number of filters including state, practice type and size of firm.  This gives you a relevant and meaningful benchmark to work from and realistic goals to aim for.
  • See how your firm's performance is tracking over time, whether you have realised your full potential this year and understand the gaps that need to be addressed to achieve peak performance.
  • Gain insight into how the legal industry expects to perform in FY14.

About Our Guest Blogger


Andrew ChenAndrew Chen leads Crowe Horwath’s Professional Practice Advisory team and has significant experience providing advisory and tax accounting services to businesses of all sizes. 

He specialises in advising legal and professional service firms on establishing business structures, financial management in areas of internal accounting, tax administration; financial reporting and KPI performance measurement; budget and cash flow forecasting; tax planning salary packaging and preparing of tax returns.

What is stopping your firm from achieving its financial best?

Tuesday, November 26, 2013

by Andrew Chen, Partner - Business Advisory, Crowe Horwath


There is a common misconception that if your firm is financially profitable, you are performing well. Whilst this may be the case on the surface, this doesn't necessarily mean you are achieving your true personal best. Under the right conditions and given the correct advice and training, we can always swim a little faster, jump an inch higher or run that minute longer, and this is the same for the performance of your firm. 

1. Identifying your problems 


The first step is realising you have a problem! Things may be going well, especially given the current economic climate - but how do you know they couldn't be better? Or maybe they aren't but you don't know why? Can you say you are fulfilling your true potential?

In many cases, it takes analysis of multiple factors to realise which ones are impacting directly on your financial performance. 

The results of the ALPMA/Crowe Horwath legal industry benchmarking survey last year indicated that firms with outstanding tax debts or those who presented difficulty in making partner draws typically had large percentages of revenue tied up in debtors and work in progress. Along with an undesirable small gross profit margin, the expected outcome of these problems is often a cash flow issue. 

Surprisingly simple changes to processes can help. For example, reviewing engagement processes and payment terms can release cash flow from debtors - which can then help keep the tax man happy. Areas which are problematic may not even be on your radar and we often find simple solutions to help improve your financial position. 

Just the same as a performance athlete, with the analysis of benchmarked results, along with training and practice, we can identify and prioritise the problem areas and when directed towards the right solution, your firm can improve its overall performance. 

2. Understanding your situation 


Everybody, and every firm, is different. What may be your personal best today, is not your personal best next month or the next year, and what is the financial best for your firm may be completely out of reach for another firm. A vital part achieving the best is setting achievements based on incremental improvements, objectives and goals that are specific for you, or your firm. 

Financial performance is always determined by multiple factors, some of which can be internal and controllable, but in the majority of cases the external influences can be the most daunting. It is important to know that you are not at mercy to the external environment; in many circumstances nimble firms that who adapt quickly can internally mitigate these risks to gain control - resulting in financial gains. 

Understanding these influences through industry benchmarks, which are available and relevant to you, can help ensure that your firm is achieving its financial best. By comparing yourself to others will allow you to set the realistic objectives and goals you need for the coming years. 

3. Changing the future 


If you want to gain insight into your firm's true 'financial' ability and explore the areas where you need to focus on and change, I encourage you to participate for free  in the 2013/2014 ALPMA/Crowe Horwath Australian Legal Industry Financial Performance Benchmarking Study.  

It may just take a little training and some influence along the way, but if you have the good coach, a motivated trainer and the right nutritionist; you can be guided in the right direction to impact your future by improving your firm's financial performance. 

Editor's Note:


Australian firms interested in benchmarking their financial performance compared to similar practices, can participate for free in the 2013/2014 ALPMA Financial Performance Benchmarking Study, currently being conducted in partnership with Crowe Horwath. But hurry - the study closes at 5pm on 17 January, 2014.

The study reviews eight key measures including profitability, returns, working capital and revenues, and provides an excellent opportunity to get an objective view as to your firm's financial performance and how this compares to your peers. 

About our Guest Blogger


Andrew ChenAndrew Chen leads Crowe Horwath’s Business Advisory team and has significant experience providing advisory and tax accounting services to businesses of all sizes. 

He specialises in advising legal and professional service firms on establishing business structures, financial management in areas of internal accounting, tax administration; financial reporting and KPI performance measurement; budget and cash flow forecasting; tax planning salary packaging and preparing of tax returns. 

Budget Tips for Financial Year Planning

Tuesday, May 07, 2013

By John Swete Kelly, Principal Business Advisory, Crowe Horwath

As you prepare for the new financial year (yes, less than 50 days to go) it is important that you step back and reflect on what has occurred - good and bad, and start your planning for  next year. 

Remember your budget is the financial representation of your business plan, you should be able to define the activities which are associated with the fees generated, the cost of service and the overhead expenses.  Obviously the budget and business plan go hand in hand and you cannot have one without the other.  Take some time out to review and work on your business, rather than working in the business.

Reviewing your Achievements and Setting your Goals


The results of the review of your business should be a set of strategic and business improvement objectives (financial, customer, process, people, technology) which you can sequence and allocate to different quarters for achievement.  The objectives will often be broken down into subordinate initiatives and tasks which provide a logical completion schedule.  

In your review you should also have identified the minimum standards of performance.  The achievement of your Business as Usual (BAU) targets is critical if you are going to achieve your budget.  The budget should have clear financial objectives for the year, quarter and months.  You could also create detailed budgets for different offices, services, or client groups.  These financial measures will typically include the following:  Fees, Cost of Service, Gross Profit, overhead expenses, Operating Profit (EBIT), Debtors, WIP, Lock-up.  

The non-financial targets in the business plan will typically include: 
  • Sales pipeline targets for service lines and customer groups
  • Revenue target for your different service lines
  • Customer satisfaction targets including, client satisfaction survey results, repeat business, client complaints, lost clients and new clients
  • Process and activity targets:  Open files, file reviews, file closure, rework
  • Staff satisfaction:  staff turnover, training, satisfaction, innovation, client referrals, new staff referrals

Key points to consider when developing your budget


Think broadly:  Get input from staff to encourage engagement and commitment. Take a balanced view of the business and test each issue by asking yourself what are the implications decisions.  What if you do nothing?  What if you take action?

Set clear business objectives: All objectives should be action statements which specify an outcome.  They should start with a verb.  Someone must be the owner and they should have a completion date. They should have clear measures of success, such as:
  • Increased fees
  • Decreased relative cost of service
  • Improved staff productivity
  • Reduced rework
  • Decreased overhead expenses
  • Decreased relative debtors
  • Decreased relative WIP

Creating Your Budget


When creating your budget remember that it's the financial representation of your business plan, so both are done in conjunction. Key points to remember when creating the budget are:
 
1. Defining costs
Separate your costs between those which are a cost of service and those which are an overhead or support cost. This is essential if you are going to accurately know your true cost of service.

2. Variable vs Fixed Costs 
Know which of your costs are variable. A variable cost will increase or decrease in relation to sales volume, such as the number of staff hours required. A fixed cost would be rent for example.

3. Other costs to consider
Make sure you have included the costs of your improvement projects and any other one off expenditures.

4. Break even analysis
A break even analysis will determine the fees necessary to cover your total costs before you have made any profit. Then calculate the fees you will need to achieve your profitability target. Your sales target should be this figure or something higher.  Remember the implication of discounting; you will need to significantly increase your fees to achieve your Gross Profit target.

5. Check capacity 
Do you have the capacity to achieve the necessary monthly, quarterly and annual targets?
  • If not, can you increase price, increase productivity, improve efficiency, or reduce costs?
  • If you do not have the capacity will need to go back and review the business plan and the budget assumptions.
6. Profit days / month
If you achieve the fee targets you have set, how many days in the month are associated with covering cost (when do you cover your costs) and how many days of profit generation are there?

Keep Tabs on Your Working Capital (Lock-up)


Ensure you are closely monitoring your working capital. Firms refer to this as ‘lock-up’ and have various ways to calculate it.  This is how fees are converted to cash, it’s the economic engine of your business. Set tight targets for your working capital and monitor and enforce them. If not, you may find that you will have a cash flow problem. The important thing to remember is, don’t over complicate the calculation process and ensure that you can easily recognise where an issue is and how to resolve it.   

Set targets, policies and strategies

You need targets, policies and strategies to account for:

  1. Debtors (accounts receivable): What are your collection terms, when do you remind the client, how do you collect and enforce collection?
  2. Work in progress (WIP): Do not hold surplus WIP, conduct regular reviews and write-off when necessary.   What is your write-off policy and how do you rectify business processes which are consistently generating excessive write-off?
  3. Creditors: Negotiate realistic terms with your suppliers and then pay when the payment becomes due. If you pay in advance, the supplier will be very appreciative, however you will deprive yourself of the use of that cash. Each day you hold it, it is generating interest - for you.  
  4. Operating cash: How much cash does the business need to hold to ensure that it can maintain its liquidity and meet its payments as and when they fall due. There should also be a buffer to cover unforeseen circumstances. What is your cash management policy?
Taking the time to plan and prepare effectively for the coming financial year will help you to continue to grow and improve your business.  All owners and managers should be ensuring that realistic business plans and budgets are prepared for the year, quarters and months.  Staff, Managers, Investors and Lenders expect good businesses to have business plans and budgets. They are MUST HAVES not Should Haves or Could Haves.
 

Editor's Note:

The ALPMA Financial Performance Benchmarking Study, conducted recently in conjunction with Crowe Horwath highlights eight key financial indicators of practice health and results can be compared across a number of filters including fee revenue and work type. Key measures reviewed include profitability, work in progress days, debtor’s days, labour cost, rent and working capital. Download the Results Summary for free.

About our Guest Blogger


John Swete KellyJohn Swete Kelly is the Principal of the Business Advisory team for Crowe Horwath in Brisbane. John specialises in developing and implementing improvement programs incorporating business and financial acumen, performance  management, corporate transformation and succession planning. 

These programs often include business simulation training with staff at all levels. John also works with clients to implement benchmarking and performance management reporting systems for financial and non-financial KPIs.  


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