Did you go to law school because you thought there would be no math? And now you have to figure out the financial reports for your law firm and are totally confused on where to start?
Maybe it is time you hire a Fractional CFO for your law firm! Read on to find out how a Fractional CFO will help your law firm with smart, sustainable growth so you don’t burn out or run out of cash.
What is a Law Firm Fractional CFO?
If you think about big businesses, you know that they often have a Chief Financial Officer in the C-suite. This person’s job is to manage the financial going-ons of the company, from revenue collection to expense management, strategic visions, and long-term financial stability. However, many small businesses don’t have the need for a full-time CFO. There is not enough work to keep them busy, plus the business does not have the resources for a full-time employee in this position (because great CFOs don’t come cheap).
That’s where the Fractional CFO comes in. This is a person that works part-time for your company and others at the same time. You get their knowledge and experience, but don’t have to worry about keeping them busy all the time nor paying their full-time salary.
Specifically for law firms, a Fractional CFO is a great asset for you. Most law firms need guidance to run their finances better, but you do not need the full-time CFO. Law firms owners can hire a Fractional CFO, use their knowledge and experience, while the owners can remain focused on other parts of running the firm or managing cases.
A Fractional CFO that is also a lawyer, like Kimberly DeCarrera provides additional knowledge and expertise compared with other fractional CFOs. From industry insights to knowledge about the practical realities of running a law firm and complying with lawyer ethics. Because no one has time to risk a bar complaint because their firm finances were a mess!
Setting Your Long-Term Vision
Do you know what you want your law firm to be long-term? Do you want to create a multi-state juggernaut to serve thousands of clients? Do you want a small, but powerful niche practice? Do you want to be the CEO of your law firm or do you want to be duking it out in court in big stakes litigation?
The first thing that we do with clients is to design the blueprint for your law firm so that your law firm works for you and your life, not the other way around. After all, what good is being your own boss if you are building something that you don’t like? If you do that, you will end up burned out and perhaps burning it all down one day.
Once we know what we want the law firm to look like, we can break it down into medium term and short term goals. This will drive your decisions going forward.
Tip: Life can come at us fast. Your plan is not a fixed in stone forever plan. It can change as your life changes. Whether that is your personal medical conditions or family situations, or even changing personal philosophies or values or macro economic market changes, your law firm vision and plan can change as you need it to.
Kimberly DeCarrera, Law Firm Fractional CFO
Law Firm Financial Statements
The next thing that we work on is your law firm’s financial statements. If you have been DIYing it or using a bookkeeper that is unfamiliar with law firms, then we will spend some time cleaning up your books. This is pretty common, especially with firms that have trust accounts. Many bookkeepers do not know how to properly account for transactions in and out of IOLTAs, unfortunately.
Tip for Law Firm Owners: A quick check to see if your law firm financial statements might be in good shape is to look at the balance sheet. Is your trust account listed as an asset? Is there a corresponding liability for trust account liabilities? If the account is not both an asset and a liability or they do not match, then you may not have accurate books. Time for a professional to take a look!
Kimberly DeCarrera, Law Firm Fractional CFO
The financial statements, including the profit and loss or income statement, the balance sheet, and the statement of cash flows, are the basis of all the work that a Fractional CFO will do for your law firm. It is imperative that these be as close to accurate as we can get them.
Every month, we will review with you the results of the prior month and look for trends – is your revenue increasing or is it falling? Are your expenses trending up or down? Is your marketing resulting in new leads and signed cases?
We will also review your actual results against your annual budget, to ensure that you are on track to hit your goals for this year and long-term.
A big thing that I really pride myself on is also the training and education that law firm owners get from our time together. You will learn how to read the financial statements so you can see what I am seeing, when I analyze your financials. I will show you what to look for so that you can continue to look for these issues on your own and even proactively identify them before we talk. I love those light bulb moments from clients.
Creating a Budget
If you are going on a road trip, one of the first things you probably do (after picking your destination: see setting your law firm vision) is to put the destination in your GPS to get the best route picked from your starting point.
Your budget is that GPS route – it tells you how to spend to get the revenue and profit goals to get where you want to go.
Each year, we will review together your law firm vision, long, medium, and short-term goals, and your starting point, to begin the budgeting process. With those goals in mind, we will break down your financial statements to match the growth that you want to accomplish.
See Also: The Keys to Running a Successful Personal Injury Law Firm, Financial Edition
Revenue Goals
Typically, growing law firms are going to grow by adding more revenue to their top line (top line because on an income statement, revenue comes first). To build your budget, we will use your annual revenue goal for the year and break it down on a monthly basis.
We want the end result to be reasonable – except for some contingency fee firms, you aren’t going to go from zero to $10,000,000 overnight or even in one month. So we need to plan out revenue increases over the months and years to something that is actually achievable. Otherwise, you will never look at the budget ever again.
We will review your work-in-progress and current client list to project when revenue will hit. We will also look at your marketing pipeline to project when new cases will come in and how that will affect revenue projections.
Expenses or your “It’s not in the budget” excuse
These revenue projections will also help us to allocate expenses, especially when it comes to staffing and marketing, the two biggest variable expenses for most law firms (technology being the third).
Starting with marketing, if you know that you need to close X number of cases this month to hit your revenue targets later this year, then you can set your marketing budget appropriately. We typically start with the general category and then break it down into various forms of marketing – paid ads, SEO, print ads, etc.
And then once we have the cases, we need the people to work the cases. The budget will also allocate funds for payroll, taxes, insurance, and other employee related expenses. We can also build out certain variable items, like technology license seats when we are adding employees.
We will also fill in the rest of the budget, to include insurance, office rent, supplies, continuing education, and the other line items in your income statement.
A great thing about having a published budget in your law firm is that when salespeople try to sell you on something new, you can more easily shut them down because “it’s not in the budget.” This is your strategic operation game plan that you know fits with your strategic vision for your law firm.
See Also: Stop Overspending in Your Law Firm
Execute the Game Plan
With revenue and expense targets, this will give you the game plan to execute your vision.
Once this is in place, some law firm owners will even hand it over to their Operations or Office Administrator to run a lot of the day-to-day decisions. Having the big decisions already made means that you can focus your brain power on other strategic goals, like improving law firm operations.
Tip for Law Firm Owners: Delegate but don’t abdicate. Even if you have a budget and a trusted operations manager, you need to manage your law firm. This is not a situation where you can become an absentee owner.
Kimberly DeCarrera, Law Firm Fractional CFO
Law Firm Staffing and Compensation Plans
Once we have a high level budget for payroll, we can build out effective compensation plans, including bonus plans or variable compensation plans. This plan will also tell us when we need to add new staff to accommodate your firm’s growth.
Staff Level KPIs
One of the things that we do when developing the compensation plans, particularly when it comes to bonus and variable plans, is to develop staff KPIs or Key Performance Indicators.
For lawyers, KPIs will typically include hours billed, cases closed, revenue generated, and similar metrics. For non-lawyer staff, it can be things like demand letters sent, hours billed, or other practice area specific tasks that we identify that help move cases forward.
I will admit that I also love to have a mix of individual and team related KPIs in the compensation plans. It helps to make sure that the overall firm is moving forward and not one individual focusing too much on their own activities. For example, if you make your compensation plan entirely on hours billed, it does not incentivize delegation to lower level staff like junior attorneys or paralegals that can do the work at a lower rate. It may also incentivize cases sticking around for longer than they should, threatening client satisfaction.
Why We Love Variable Compensation Plans
Have you ever thought about how risky it is to grow a law firm? You are hiring a lot of staff and hoping that you can pay for it all later when the cases come in and you get paid. Or maybe you are worried that you aren’t going to hire someone that can keep pace with the growth or meet those KPIs you have set.
Variable compensation can tie together the firm’s success and the employee’s pay. If they can be rockstars and increase the firm’s revenue, they can share in that success by earning more dollars. However, if they are not the right fit or the cases don’t materialize, then you have lower risk.
Variable compensation can also help take some of the animosity away from employees that see what they are billing and doing the math compared to what they are earning. They know that if they can bill more (or close more contingency cases), then they can earn more. The employee is less likely to feel animosity to the law firm owner that the more that the employee works, the more that the firm owner makes.
Iterative Process
One thing to realize is that the budget process is an iterative process. While we lay it out here in a linear fashion, there is often a lot of back and forth between the different sections.
Take compensation for example.
I described it as the total compensation in the budget and then we break it down in the compensation planning. But once we get into the compensation planning, we may see that something isn’t realistic. Maybe to hit certain targets, we have to hire a lot more people than we can realistically hire in our market. So we need to adjust the payroll amount as well as the revenue in the budget.
It can often be confusing and frustrating. But know that this iterative process is what drives a realistic budget that is actually useful and not just a fantasy.
Cash Flow Management
One of the reasons that law firms come to me is that they are in a cash flow crunch. They know that they should have the money based on the work they are doing, but the money isn’t in their bank account when they need it.
A big part of my job is making sure that you have the cash where you need it, when you need it. This can include modeling out the cash flow for the future, so that you know when you might have a cash flow crunch. It dire situations, it can include figuring out what bills you can postpone and pay late versus the ones that are not optional (looking at you payroll). Other times it will include managing lines of credit and other credit products.
It can also involve billing and collections. Do you have large amounts sitting in work-in-progress that have not been billed? We can work on getting the invoices out – because clients are going to pay until you invoice them. And if you have invoiced, but the clients have not paid? Maybe it is time to think about a collections sprint to get clients caught up on billing.
Legal Service Pricing – Models and Fees
If you think about it simply, there are only two ways to increase revenue in your law firm. You can either 1) add more cases or 2) increase the fees that you charge clients. While marketing may help with adding more cases, your Law Firm Fractional CFO will help you appropriately price your services to maximize the revenue that you can get for the legal services that you provide.
And it’s not just setting the hourly rate. More and more, law firms are looking towards other pricing models like subscription and flat fee. Your Fractional CFO will help you design and price these subscription and flat fee models so that the firm will make money. This is where having a Fractional CFO that is also a lawyer really comes in key – from the various ethical rules on pricing and IOLTA requirements to understanding the business model and what clients will pay for. Hiring a Fractional CFO that is not deeply enmeshed in the law industry will not serve you well here.
Policies and Procedures
Did you know that a well functioning finance function can actually help client satisfaction in your law firm? From timely billing to quick distribution of personal injury settlements, handling a client’s money with accuracy and efficiency is key. This is where strong policies and procedures come in.
As your Law Firm’s Fractional CFO, I will help you develop custom policies and procedures that fit your office, technology, and staff as well as comply with our ethical requirements. We can dive into everything from who handles the money, the documentation, how bills get paid, and more.
Tip: Don’t forget to get those W-9s so that you can properly issue 1099s in January! It is the easiest to get the information prior to issuing any payments. This will prevent you from having to chase them down for the information during tax season, when you might get ghosted.
Kimberly DeCarrera, Law Firm Fractional CFO
See Also: Protect Your IOLTA Trust Account When Your Bank Fails
Manage and Train Finance Related Staff or Contractors
I am going to be honest with you here. You don’t want your Fractional CFO doing Controller level duties nor bookkeeping. It’s not the best use of their time nor your money. Because there are individuals that are better suited that cost less. Meanwhile, your Fractional CFO can be focused on higher-level strategic opportunities.
But back to the idea mentioned earlier of delegating, but not abdicating, your Fractional CFO can and should be training up staff members or contractors that are responsible for these tasks. From making sure bills are paid on time to IOLTA reconciliations and paperwork and payroll is being completed, the Fractional CFO can help your team here. No one expects you as the law firm owner to be able to properly train them up or even supervise them since it is a different skill set than you know.
Handling Third Party Relationships
Do you have a line of credit from a bank? If it is sizeable, you probably are required to regularly communicate with the bank over your law firm financials. As a Fractional CFO, I can handle that process for clients. And if you don’t have a LOC already and want to explore one, I can help introduce you to bankers and negotiate the terms for you.
Same with landlords. And CPAs. And personal wealth advisors. And generally other third parties that require certain financial information from you.
When to Hire a Fractional CFO for Your Law Firm
Are you looking for a strategic growth plan? Tired of managing your law firm like you manage your personal finances? Are you worried that you won’t have the cash to pay your team?
Springboard Legal works with law firms of all sizes, from solos just beginning to large multi-state, multi-practice area firms. If you are ready to turn finance into a strategic asset to your law firm, then now is the time to hire a Fractional CFO so that you can continue with strategic growth, without burning out or running out of cash.