Law Firm Revenue: How to Track & Maximize It
Law firms, like all businesses, need to bring in revenue to succeed. But with so many factors influencing law firm revenue, it can be challenging to know where to start when looking to improve financial performance. In this article, we will explore the key factors that affect this figure while also providing actionable insights on the metrics to track and the steps to take to boost your law firm's revenue.
What is Law Firm Revenue?
Revenue is generally thought of as the total amount of money a business generates from its operations. For a law firm, business operations will consist of providing a variety of legal services, ranging from filing paperwork to representing a client in court. These are all things a firm will bill for, and the firm’s revenue will come in as those bills are paid by clients.
Why is Maximizing Law Firm Revenue Important?
Maximizing revenue is about more than just making money. It also allows a law firm to grow, while also furnishing the resources needed to invest in new technology, attract top talent, expand services, and pay for marketing to grow its client base.
How Much Revenue Does The Average Law Firm Generate?
In thinking about the role that maximizing law firm revenue plays in long-term success, it can help to spend some time understanding how much revenue law firms generate on average. By becoming acquainted with these facts and figures, you’ll have a general sense of what other law firms in your situation are bringing in and how you compare. This, in turn, will help you get a handle on the improvements you need to make to boost your law firm’s revenue.
Based on data from the 2020 Martindale-Avvo attorney compensation report, in 2019 the average law firm made $192,000, slightly down from 2018’s $194,000.
Of course, a lot of subtlety can be hidden in raw averages. Many factors impact the revenue law firms earn, so let’s get a clearer picture by breaking earnings down in more detail.
Type of Client
As you might expect, different kinds of clients compensate at different rates, and this can dramatically influence a given law firm’s revenue.
In 2019, law firms specializing in serving business clients made the most money, $238,000 a year on average. Those predominantly serving consumers made $181,000 a year, and those serving both consumers and businesses made $175,000 a year.
There are many different ways of practicing the legal profession, with the two prominent options being working as a solo practitioner or working as part of a small legal team.
This can impact your earnings substantially. In 2019, attorneys who worked in small firms earned an average of $210,000 annually, with solo practitioners making $150,000 annually, a difference of $60,000 per year.
Hourly billing has long been the preferred way of charging for legal services. With 77% of respondents indicating that hourly billing is their favored method, the 2020 Martindale-Avvo attorney compensation report shows that it’s still far more common than alternative billing structures.
But there is clear client demand for flat fees, subscription services, and various other arrangements, and the legal profession is beginning to change to meet this demand. By raising customer satisfaction and making it easier to get paid, exploring alternative billing structures could ultimately make a big impact on how much your law firm revenue ends up being.
What Are the Key Metrics for Tracking Revenue for Law Firms?
It’s hard to improve on what you can’t measure. Whether you’re trying to lose weight or learn a foreign language, you need to choose KPIs by which to measure your progress over time. This allows you to understand which strategies are working and which aren’t and will enable you to make adjustments along the way to improve outcomes.
In the next few sections, we’ll cover a few of the most important metrics you should be tracking as you attempt to boost your law firm’s revenue.
Clients can’t hire you if they don’t know you exist. For this reason, marketing expenses are often one of the biggest consistent outlays for law firms. This means that carefully tracking expenses related to marketing is an important part of any attempt to increase revenue for attorneys.
At a minimum, you should be aware of your total marketing expenditures, the leads generated from these efforts, the fraction of those leads convert into paying clients, and how much the average client ends up paying.
This is enough to give you a pretty good idea of how well your marketing efforts are paying off. You might also consider dividing leads up by the marketing channel you used to get them. It may turn out that clients generated from newspaper ads pay a lot more than ones generated from social media and this information can help you refine your targeting and messaging.
Speaking of marketing, one of the most effective forms of it is word-of-mouth. A word-of-mouth referral occurs when someone, such as a past client, recommends your law firm to someone else. Referrals are one of the main ways a legal practice builds a steady stream of potential future clients, and as such are an extremely important metric for you to be tracking.
There are many ways of doing this; you might track referrals quarterly, for example, or track them annually. It also helps to attach a dollar amount to each referral, so you can get a sense of how much each referral contributes to your law firm’s revenue. For the same reason, it also helps to know how many referrals actually convert into paying clients.
Armed with this information, you can gauge how much energy you’re putting into referrals on average and how much money that actually ends up making you in the long run. It may turn out that you should be working on generating more overall referrals, or perhaps the opposite is true, and you should instead be narrowing your focus to a smaller number of higher-quality referrals. The only way to tell is by gathering the data you need.
Billing Realization Rate
The billing realization rate is the ratio of what you billed a client versus what they actually paid, and it’s an important part of financial reporting for law firms. It’s fairly common for a law firm to give a client a discount if they ask for one, so you might end up getting $15,000 for a $20,000 invoice.
On its own, this is not a bad thing. Being willing to meet clients where they are financially can be a great way of building your reputation, and happy clients are also clients that are likely to refer your law firm to others.
But if you’re offering too many discounts, this can take a bite out of your law firm’s revenue. The only way to tell is by tracking the billing realization rate over time and seeing how this impacts your bottom line.
The collection rate, which is the ratio of the number of hours you bill for versus the number of hours you actually get paid for, presents similar challenges to the billing realization rate. A client might disappear, fall on hard times, or outright refuse to pay you, and depending on the case size, it may simply not be worth the effort of tracking them down to collect the money you’ve earned.
The 2020 Martindale-Avvo attorney compensation report found that the mean collection rate is 88%, meaning that law firms fail to collect for a full 12% of their billable hours.
Depending on the specifics of your situation, your collection rate may already be at the optimum level. There are no doubt many cases in which it’s better to cut your losses and move on, but the only way to tell for sure is by tracking the collection rate over time and seeing how this relates to your law firm revenue
How to Increase Your Law Firm Revenue
With all this having been said, let’s now turn to discussing the steps you can take to boost the total revenue for attorneys your legal practice is bringing in.
Use Legal Billing Software
An obvious place to start is using legal billing software. By substantially automating the process of tracking your hours, calculating the total amount owed, sending invoices, and sending periodic reminders to clients, legal billing software can go a long way towards reducing clerical errors and making it easier to ultimately get paid.
LawPay Pro, for example, is the latest advance in software built to help legal professionals manage the financial side of their business. LawPay Pro contains all the functionality that made LawPay the leading online payments solution for law firms and also makes it easy to track hours, send invoices, accept a wide variety of payments, and track key performance indicators. What’s more, it has features that support contract management, text to pay, and a legal fee lending solution called Pay Later.
The number of law firms using legal payments software climbed to 34% in 2022. With more firms than ever leaning on technical solutions to manage the financial side of their business, the time is ripe for software that makes this process easier.
When it comes to increasing law firm revenue, consistent billing is a must. For one thing, promptly sending an invoice for services rendered makes it more likely you’ll also get paid quickly. Clients are unlikely to pay you before they’ve actually received an invoice, so the sooner you get it to them, the sooner they can begin the payment process.
Additionally, consistency breeds trust. When clients see that you handle your billing quickly and efficiently they’ll know that you run a tight ship, and they’ll be more comfortable trusting you with their legal affairs.
Focus on Customer Service
A law firm provides legal services, and creating law firm goals around making customers happy is crucial, just as it is for other businesses. Customer satisfaction is a tough thing to measure directly, but that doesn’t diminish its importance.
By taking steps to keep your clients happy—being professional, forthright, polite, and so on—you’ll contribute to your positive reputation and increase the chances that they’ll use your firm in the future and refer you to others.
Allow Multiple Payment Options
To paraphrase Bob Dylan, the times are changing. Today’s clients expect that they’ll be able to pay with credit or debit cards, e-checks, or by financing their legal fees, all of which are supported by LawPay. There are also many innovations emerging in the way such fees are structured. Though hourly billing remains the most popular choice, more and more firms are opting to offer alternative payment arrangements such as:
- Subscription models, in which clients can pay a monthly fee to access legal services, just as they might pay for membership to a gym.
- Payment plans, which enable clients to pay down large legal expenses in manageable monthly payments.
- Flat fees, which are great for relatively formulaic tasks, such as drafting a will or fighting a traffic ticket in court.
- Sliding scale fees, which price services according to the economic means of the client, with wealthier clients charged more than relatively less well-off clients.
In the ongoing struggle to boost revenue, law firms can gain a competitive advantage by offering more than one way for clients to pay for their services. This will not only increase client satisfaction, but it’ll also open you up to a broader range of clients who otherwise might not be able to afford your rates.
Start Tracking the Right Metrics and Boost Revenue With LawPay
Tracking the right metrics and implementing effective strategies is crucial to increasing your law firm’s revenue, whether that involves using legal billing software to automate your billing process, maintaining a focus on providing premium customer service, or offering a range of payment options. To see LawPay in action and how it can help your firm boost its revenue and achieve greater growth, get in touch today!