5 Profitability Strategies for Small Law Firms

As a whole, law firms started 2023 with struggling financials, but by the end of the year, profits rose as demand rose 2% year over year. Certain sectors of the industry rose more than others, such as the demand for bankruptcy lawyers rising more than 6%.

Two main reasons for growth were cited for the turnaround: incorporating profitability strategies to rein in costs and raising rates.

If your firm is facing lower profits, leveraging the strategies below will help you start lowering expenditures while keeping profits higher.

Revenue vs. Profitability: What’s the Difference?

Revenue and profitability are not the same, although you may confuse the two terms. A firm’s revenue can be $10 million and profitability $2,000,000, but with the right profitability strategies, you can turn your profits into $3,000,000 or more.

Profitability can be seen as your firm’s:

• Financial health
• Success

Revenue is brought into a firm through selling services, but profit is what you have left over after subtracting your overhead.

5 Profitability Strategies for Small Law Firms

Increasing your firm’s profitability is possible using many strategies – including but not limited to – the following:

1. Outsource Non-Core Tasks

How many non-core tasks do you have that you’re not outsourcing to someone else? A general rule of thumb is to:

• Focus on billable work
• Outsource the rest

If you follow this mantra, you’ll be well on your way to higher profitability. Unless it’s a task that you truly enjoy, you should spend time outsourcing every task that isn’t adding revenue to the firm.

Delegating tasks is crucial to your long-term financial success.

You can hire paralegals to handle many non-core tasks:

• Document prep
• Follow-ups with clients
• Client intake

Free up your time to allow for strategic focus on the work you perform. 

2. Invest in Technology and Automation

Delegating to a human is an obvious choice for reaping more profits as a law firm, but you also need to invest in automation and technology. Consider using cloud-based LPM software.

Automation is another key area that requires initial investment but will free up substantial time, and this includes automating:

• Legal billing
• Client intake 
• Expense tracking

If you automate as many of the non-billable tasks as possible, especially on the administrative side, it will help your firm remain more profitable.

3. Track Key Metrics 

Tracking your firm’s KPIs is just as important for improving profitability as any other strategy on this list. After all, you can’t determine whether your strategies are working if you’re not tracking your firm’s performance. 

Plus, when you track key metrics, you can identify areas to improve. 

Make it a point to track your KPIs weekly, monthly and quarterly to keep tabs on your performance and make improvements as needed.

4. Fire Resource-Hogging Clients

No law firm wants to fire a client, but in some cases, it’s necessary. When clients are using up more resources than feasible, they may need to be let go.

These include clients who:

• Do not pay their invoices or are repeatedly delinquent with payments
• Refuse to follow directions or submit documents on time, forcing you to invest more time and resources in the relationship
• Have unrealistic expectations of your firm

As difficult as the process may be, parting ways with resource-hogging clients will free up time to focus on more profitable clients.

5. Improve Your Cash Flow Management

Healthy cash flow is crucial to your firm’s profitability and financial survival. Finding ways to improve your cash flow management can help you avoid falling into negative territory.

Firms can improve their cash flow by:

• Trimming expenses whenever possible (without sacrificing quality)
• Accepting online payments to make it easier for clients to pay invoices 
• Offering alternative payment options
• Following up on unpaid invoices
• Sending invoices in a timely manner

The goal is to minimize the time between sending out invoices and getting paid. The quicker your firm gets paid by clients, the easier it will be to maintain healthy cash flow – provided you’re not operating above your means.

However, many firms struggle with invoice collection. The 2021 Legal Trends Report found that the average collection rate for law firms was just 89%. 

Positive cash flow indicates that your firm has enough funds to cover its operating expenses. You may find that you have a surplus of cash, which you can use to reinvest in your business and improve its profitability.

Final Thoughts

Improving profitability is important for every firm, but it’s especially important for small firms with fewer resources. Outsourcing, automation and improving cash flow management can make a huge and immediate difference in your firm’s profitability. Tracking key metrics will help ensure that you’re steering your firm in the right direction and adjusting your strategies as necessary.

Consulting with or working with an experienced accountant can further help you find ways to improve profitability.To learn more about profitability strategies or how we can help you with your accounting needs, schedule a consultation now!