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Small firms: tackling the profit problem

1 January 04

Small firms are no different to larger firms when it comes to the essentials of financial health

by Brian Allingham

The biggest threat to the health of any law firm is, quite simply, a failure to make enough money.

Spike Milligan said that money doesn’t make you happy – but it does buy you a better form of misery. And without enough money, our business lives can be pretty miserable. It’s the shortage of money which leads us to taking shortcuts, cutting the wrong budgets and making mistakes

According to the Law Society’s figures, 25% of one partner firms are making profits of £25,000 per annum or less. In Edinburgh and Glasgow the figures are even worse – 25% of firms are making £17,000 or less. That is less than a decent salary – much less.

But partners in small firms don’t want to work for other people – they work hard, they accept responsibility for what they do and most of you deserve to earn more than just a decent salary.

Changing gear

One of the keys to profitability is the “gearing” of our firms, that is the ratio of partners to other fee-earners. The Law Society’s research shows quite clearly that the more profitable firms are employing more fee-earners per partner.

Among one-partner firms, the most profitable firms average one additional fee-earner while all the other firms average less than half a fee-earner. The same pattern is repeated for 2-4 partner firms. The message is clear: the most profitable firms have more non-partner fee-earners.

It does not follow that, by hiring another fee-earner, you will make yourself more profitable. You won’t. You’ll have to pay her wages and, initially at least, hiring another fee-earner will actually make you less profitable in the short term.

However, clearly:

  • A growing successful business can afford extra staff.
  • It is difficult to expand without extra fee-earners.
  • A struggling business cannot afford more staff.
  • If you have no extra fee-earners, then the scope for improving profitability is restricted.

So, how do you improve profitability?

The usual suspect is cost-cutting. Certainly, costs should be monitored, to avoid wasteful expenditure. But this should be the norm, not something you do in an emergency.

And cutting costs can be dangerous. Cutting your IT, marketing and training budgets (if they exist) can reduce your ability to earn fees in the future.

What about your employees? Are you employing the right people? Are you giving them proper training? The sort of training which converts a secretary into a paralegal?

Are you providing good working conditions? People work better when they are working in a decent place, with good facilities and a pleasant atmosphere.

Are you practising quality control? Delivering a good service promotes your firm to your clients (and their friends) and helps you to avoid errors.

Quality control leads to good client care and this is more than just risk management. It involves getting the job done right first time and impressing your clients with the quality of your services.

Are you exercising proper financial controls? Are you using understandable management accounts and exercising good credit control? Are you collecting all the fees to which you are entitled? Are you insisting on:

  • Payments to account of fees or outlays at the start?
  • Automatic interim billing, in court and executry files?
  • Automatic, but ever-so-polite reminders to non-payers?

And are you charging the proper fee for the job? There is always scope for reviewing your fee charges and looking for ways of increasing what you are being paid for the job. If you are not being paid enough, then the job may not be worth doing.

And are you planning ahead?

The world is changing faster than ever. Ten years ago there was no internet, no email, no shortage of assistants, no specialist firms chasing your best clients. The world has become a tough place to earn a living and the rate of change is accelerating.

We have to react to that by making planning something we do constantly. Some quality time invested in thinking through what you want to do and writing down how you intend to achieve future success will be time well spent.

Small firms can be as profitable as larger ones, but, to achieve that, it is important that you market your firm properly, provide a quality service, and perhaps above all, charge a proper fee for the work you are doing.

We have to work hard to earn our current profits and this leaves us little time to invest in planning, marketing, improving quality and, generally, managing the firm. That is a vicious circle which has to be broken.