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Putting profit first is the best thing you can do for your law firm, yourself, and your clients. The word “Profit” has somehow become a charged word, so before exploring the virtue of putting “Profit First,” it makes sense to be really clear on
- what “Profit” really is, and
- when you put Profit First, what it is that you are no longer putting first (and whether you are OK with that).
Once you come to the decision to put profit first, you can then choose the profitability of your law firm. It is difficult or impossible to do this when you run your firm (or any small business) the “traditional way,” which typically puts profit last.
Profit
What is Profit? Some think of it as almost a dirty word when in fact it is anything but!
The formula of Profit is simple:
Profit = exchanging something you value less, for something you value more.
As a simple example, Paul loves chocolate ice cream and hates vanilla. Mary loves vanilla, and dislikes chocolate. They have each been handed an ice cream cone. Unfortunately, Paul got vanilla, and Mary got chocolate. As they are deciding whether to throw away their cones, they bump into one another, and discover their mutual dilemma. Not surprisingly, they exchange cones! Each one gives up a thing of lesser value for a thing of higher value! Both have experienced Profit.
There is some thinking that profit for one person or entity must come at the expense, or to the detriment of another. That is manifestly not the case. Profit that comes at another’s expense is unsustainable. Indeed, law firms making their way with this kind of one-sided profit will find it difficult to maintain their businesses, and will probably be a pretty lousy place to work.
In the context of a well-run, sustainable law firm, Profit works the same way:
- Clients have problems (or opportunities) for which they do not have the skills, knowledge, or time to effectively solve.
- These problems are affecting the clients’ financial, personal and/or reputational well-being.
- What the client has is money, or the means to get it. In this circumstance, the client values the money less than having a good solution to their problems.
- In order to make a profit, it is essential that the client have a thorough understanding of the value of the lawyer’s contribution to solving the client’s problem, and that value must exceed the value of the money the client pays to the lawyer.
Part of the lawyer’s job is to educate the client as to the true value of (rather than solely the expense of) the services. This is best expressed as the difference between where the client will be if the problem goes unresolved versus where the client will be with the lawyer’s help. This enables the client (and the lawyer) to evaluate whether working together will be profitable for the client.
The lawyer, on the other hand, has the skills, knowledge, and time to work on the client’s problem, and to deliver the solution that the client values so much. The lawyer must then first determine, with specificity, the cost to her business of delivering the solution to the client. How much of whose time will go into the solution? What direct costs will there be? As a baseline the lawyer must know that she can deliver the solution for a cost that is less than what she charges, i.e. that she can also make a profit.
The goal then is for lawyers to work with clients that can profit from working with them, while the firm makes a profit too. This is the way in which every sustainable relationship perseveres. When only one side profits, typically it is the result of one of two things:
- An inequitable power relationship (the stronger party basically taking from the weaker). This may be successful in the short term, but is far from satisfying, of questionable ethics, and in the end, is unsustainable; or
- A desire for one party to get something else from the relationship. For example, lawyers frequently seek to derive self-esteem from engaging in transactions that are not profitable to or sustainable for the firm. This is not meant to disparage pro bono work … but to distinguish the work that we agree and decide to do pro bono, from the cases that we allow to become unprofitable without that decision.
There is no question but that it is in both sides’ best interests to be sure each makes a profit in the lawyer-client relationship. The lawyer must ensure that the firm and the client have all the information necessary to enable each to make this decision and engage, or not engage, the relationship.
Profit… First?
What does it mean then, to put profit “first”?
The traditional calculus of a business goes like this:
- Money comes in (Revenue).
- Then the business pays its employees, rent, utilities and other overhead (Expenses), and also pays Taxes.
- What is left over (if anything … fingers crossed…) is Profit for the owner(s) or shareholders of the business.
Profit is an afterthought.
Revenue
- Expenses
- Taxes
= Profit
Yet Profit is always the prerogative of the owner. Using the results you have been getting in your law firm over the past year, you can re-consider your finances in a very different light.:
- Last year, what was your profit as a percentage of revenue? That is your Profit Allocation (PA).
- What was the total amount you and/or the business paid in Federal, State and Local Taxes in the past year? What is that amount as a percentage of total revenue? That is your Tax Allocation. (TA)
- Finally, what amount was then used to run the business (i.e. Expenses)? What is that amount as a percentage of total revenue? That is your Operating Expense Allocation. (OpXA)
Where the money has been going
| Past 12 Months
$ |
% of Revenues | Next Quarter
$ |
% of Revenues | |
| Revenues | 100% | 100% | ||
| Profit | (PA) | |||
| Taxes paid / reserved | (TA) | |||
| Operating Expenses | (OpXA) |
Next, make a decision, that from this moment forward, when Money (Revenue) comes in, you will first take the Profit Allocation, and set it aside in a separate account. You then take the Tax Allocation and set it aside. Now, the Operating Expenses are what remain after you secure the PA and the TA.
Revenue
- Profit
- Taxes
= Expenses
Remember: this is the exact amount you ran the business on last year!
Mentally, however, this is a huge shift. Now, you must deal with the fact that the business must live within its means from this pot of what is left over. This will immediately clarify decision-making around new expenses, as well as wasteful old ones. This will highlight the need to increase revenues when the business wants to increase an expenditure. Most of all, this will secure the owner’s profits AND future taxes!
Once this is done, the owner can then decide to (slowly) change the profit number to meet her desired income as a business owner.
Where the money will be going
| Next Quarter
$ |
% of Revenues | 2nd Quarter
$ |
% of Revenues | |
| Revenues | 100% | 100% | ||
| Profit | ||||
| Taxes paid / reserved | ||||
| Operating Expenses |
The effect this will have on the Operational Expenses will be made more clear. To sustain profits will sometimes involve eliminating waste, and, more frequently, increasing revenues.
Most importantly, the owner will gain a much greater sense of control over the results the business provides to her … which in turn will allow her to focus on her clients. Which, after all, is what they really want, and why we all went into this business in the first place.
To find out more about how the Profit First for Lawyers approach can be a game changer for your law firm, please visit us at www.profitfirstlawyers.com or set up an exploratory appointment with me, Christopher Anderson, to discuss the benefits of Profit First for Lawyers by clicking here.
