I work with a lot of law firms as their Fractional CFO. And personal injury law firms are a different beast than other law firms. There’s really no two ways about it.
Fortunately, there are many successful personal injury law firms out there. Let’s take a look at what makes for financially successful personal injury law firms versus those that end up scraping by.
The Chaos of the Contingency Fee Model
What if I told you that you could work for months before you might get paid on a case? That’s ultimately what the contingency fee model is all about.
In the contingency fee business model, law firms get paid at the end of the case, only if they win. Typical contingency fees range in 20-40% of case value, depending on the particular law firm, the type of case, and at what stage they win. But if the case does not result in a financial win, the law firm does not receive any fees in most cases.
Cases often take months or even years to settle or receive payment. And the law firm isn’t getting paid until the very end.
Compare that to other law firm financial models, where you have flat fees (think criminal law, trademark, or immigration) or billable hours (think business law, family law, etc). In many flat fee situations, law firms sign up new clients and can immediately get cash in the bank. In hourly fee situations, the work you to do today can often get paid within 30 days. It’s easier to predict cash flow, and if there is a cash flow crunch, just sign up some more clients and do some overtime – boom, cash flow crunch fixed.
Cash Flow vs Large Payoffs
You hear about the big verdicts and settlements on the news. Maybe even see the billboards. But those big cases usually take the longest (unless you have clear liability and max out the insurance limits but also know that excess liability is going to be difficult, at best, to collect).
These cases take forever, but lawyers have bills to pay in the mean time. That’s why most personal injury firms start with and maintain a certain level of smaller cases. These are the automobile “insurance seminars” crashes that can often be churn and burn for many law firms. They are smaller dollar cases, but can be systematized to allow new attorneys and non-attorney staff to handle most of them. These smaller cases are great for cash flow, leaving the large cases to either profit or larger one-off projects or goals.
In the beginning of most PI law firms, they take on more smaller cases to build up the cash flow. Then they start banking that money so that they can slowly take on more and more large cases that take longer, eat up those financial reserves, but also have very large potential payoffs.
Honestly, most successful PI law firms do not start with the seven figure cases. It’s too hard to carry the payroll, rent, and case expenses for the duration of the cases.
Cash Reserves & Lines of Credit Help Buffer the Lackluster Months
It is inevitable, particularly as you make the transition into larger cases that you are going to have less than stellar months. Perhaps even lackluster. You may have months where absolutely zero cases settle. And that means no cash coming in the door.
But you still have payroll to make, rent to pay, and all the other bills sitting there, staring you in the face. This sometimes extreme roller coaster ride is why I encourage all law firms, but particularly anyone working on contingency fee models, to have a healthy cash reserve or emergency fund.
This can also be supplemented with an existing line of credit. But remember, it’s hard to get a new line of credit when you need it most – when the cash is tight. So get it before you need that Line of Credit.
How much do you need in reserves or accessible on a line of credit? That’s going to depend on your law firm, your personal needs, and the history of your cases. Some PI firms are comfortable with 1-2 months, while others want to see closer to 6 months out there.
As you grow your firm and have more cases in the hopper, you’ll find that the zero months because more and more rare. While settlements and payouts may decrease, they won’t go to zero. This means that you can stretch those reserves longer.
Case Selection is a Major Key
When you are taking on the risk that you have to win to get paid, you want to make sure that you are taking on winners. Especially early on in your personal injury law firm’s lifecycle. You cannot afford to take on a lot of risky cases that have the potential for zero payout later.
Case selection, though, is difficult for new PI attorneys. To be successful, you need to learn how to select cases that have not only winnable facts but a source of financial recovery – insurance, being the most likely financial source for most PI cases.
I’ll also note that while you may not think of customer concentration as much of a risk in your law practice since you have so many different plaintiffs, having all of them with the same insurance company may be a risk. Whether because the insurance company goes out of business or they change their payment policies (how would you like to go from a 30 day payout to a 90 day payout?), this concentration should be reviewed regularly. Yes, I understand that is hard when in many markets, there may only be one or two major insurance carriers for auto and home insurance.
Consistency is Another Major Key
What you do at the beginning of the year is going to impact your bank account at the end of the year. Sometimes, though, with the delayed gratification or financial returns, it is difficult to keep grinding, day in and day out.
It’s important to your financial success that you and the rest of the team stay on top of cases, constantly working to move them forward. From medical record requests to demands to pushing for court dates or settlements, you have to put in the work.
Just a little slacking off can impact you months later. The hard thing is that you may not see bottom line results from either the hard work or the slacking off in the short term, making the link between cause and consequence harder for the brain to make.
See Also: Lawyers: Don’t Use the Firm’s Bank Account as a Personal Piggy Bank
Establish and Monitor KPIs to Stay on Track
This is another area that is more difficult for newer firms, but as you get more established, you can set better KPIs.
As with all law firms, personal injury law firms need to always track a few select KPIs and can add others on as needed:
- New Cases that the firm acquires in a day/week/month/year
- Days on Desk or how long it takes to resolve cases
- Average Case Value or the average fees that you receive from your cases
New cases are going to be the lifeblood of your firm’s financial future. Days on desk is a measure of how fast you can resolve cases – the faster, the better since that means you get to the financial reward quicker plus you can now take on a new case to replace it. The higher the average case value means the fewer cases you have to take to reach your goals.
I will also add a few financial specific KPIs that everyone should be tracking:
- Payroll as a Percentage of Revenue to make sure that you are not over-staffing your firm, which will drain profit very quickly. Also, as this percentage decreases, you may also find that you have trouble retaining or recruiting staff or you are burning them out.
- Cost of Case Acquisition to make sure that you are not spending too much money to get the cases. You don’t want to spend $10,000 to get the case to only get $12,000 in legal fees since you have all the other expenses you also have to pay.
- Profit Margin is the bottom line number you take home. Obviously we want this to number to be high so that we have the reward of all the consistent work that we put into our law practices.
Consistent Monitoring of Financials
Did you choose to go to law school because you thought that there would be no math? No surprise, that was a lie. There’s a lot of math in our world. Especially financials.
Here is the biggest key though for financially successful personal injury law firms: you are consistently monitoring the financial health of your firm.
This means that you have regular meetings with your Fractional CFO, bookkeeper, tax experts, and more. You need to understand how the balance sheet works with the profit and loss. How to do basic analysis of the KPIs mentioned above or at least discuss it with your Fractional CFO.
This means that you are diving into the cause and effects of your revenue and your expenses. This is making sure that your financial processes are tight. This also means that you are diving into the effectiveness of marketing campaigns, software subscriptions, and employee compensation.
Since they didn’t teach us this in law school (I actually wish that there were more programs to teach lawyers about law firm financials, but alas, not the subject of this article), I can offer up my services to help you.
See Also: Stop Overspending in Your Law Firm
Personal Injury Firms Take Awhile To See Results
Because of the relatively long lag period between the work you do and the financial reward, sometimes running a personal injury law firm can feel like trying to turn a cruise ship or aircraft carrier. It takes a long time to stop one of these ships when underway and even more room to make a turn. Same goes for your law firm – the work you do today to acquire new customers may not pay off for months or even years.
It’s one of the biggest reasons that you have to stay on top of your financials, make sure you have set and use effective KPIs, and have a lot of faith that the consistent work you put in will be rewarded. Just in case, let’s build a healthy cash reserve.
If you are ready to make your personal injury law firm a financially successful personal injury law firm, let’s talk!