Latest / Wealthy Woman Lawyer Podcast, Helping you create a profitable, sustainable law firm you love / 188: Understanding How Revenue Drives Profit

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188: Understanding How Revenue Drives Profit · Wealthy Woman Lawyer Podcast, Helping you create a profitable, sustainable law firm you love

• 0:00
  Davina: A lot of things can affect profits. A lot of choices that you make can affect profits. Some people choose to show lower profits because they don't want to pay higher taxes. So there are a lot of things that can affect profits. But we also think is that if you're making lower revenue, then you're not gonna have the resources that you need to invest to grow your business.
• 0:22
  So if you're not making enough money in top line revenue, if you're making a $100,000 in top line revenue, you're not gonna have enough money to easily be able to hire employees or invest in software case management or other software tools to automate some of your systems or hire a coach to help you achieve your goals faster.
• 0:44
  Intro: Welcome to the Wealthy Woman Lawyer Podcast. What if you could hang out with successful women lawyers? Ask them about growing their firms, managing resources like time, team, and systems, mastering money issues, and more. Then take an insight or two to help you build a wealth generating law firm. Each week, your host, Devina Frederick, takes an in-depth look at how to think like a CEO, attract clients who you love to serve, and will pay you on time, and create a profitable, sustainable firm you love.
• 1:15
  Devina is founder and CEO of Wealthy Woman Lawyer, and her goal is to give you the information you need to scale your law firm business from six to seven figures in gross annual revenue so you can fully fund and still have time to enjoy the lifestyle of your dreams. Now here's Davina.
• 1:33
  Davina: Today, I wanna introduce our sponsor, Noble Marketing. Over the last four years, No Bull Marketing has tracked more than two fifty law firms and discovered 60 to 80% of new client calls were generated through Google My Business and Google Ads. Basically, you need to be on Google and No Bull Marketing can help. I recommend them because they have an incredible guarantee. Your campaign will be profitable in three months or less, or they will work for free for an additional three months.
• 2:03
  If they fail after a total of six months, they'll refund your entire investment including ad spend. If you could use more qualified leads, I encourage you to reach out to Ronnie Deaver at noblemarketing dot co. Mention you heard about them here on the Wealthy Woman Lawyer Podcast and Noble Marketing will waive your setup fee instantly saving you up to $2,500 or more. And now on with our show.
• 2:31
  Davina: Hi everyone and welcome back to the Wealthy Woman Lawyer Podcast. I'm your host Devina Frederick. And today I'm gonna be talking about understanding how revenue drives profit. People often ask me, Devina, why do we use revenue as a marker instead of profit, which is that money that we can put in our pocket and keep. And I'm going to get into that in today's episode.
• 2:51
  I'm going to explain to you why we do it that way. First, I want to tell you that I was inspired to today's podcast after a conversation with a client about law firm revenue and the cost of hiring and the impact of hiring on profits. She's not the only one who has these concerns. So I thought this discussion might be helpful for others as well. I was discussing with her the power of hiring, especially hiring lawyers and paralegals in a law firm business and how it can triple your revenue very quickly.
• 3:21
  And the client then asked me, but Devina, will that reduce my profits because now I'm paying all of these salaries? So these are fair questions and the best way to answer them is probably by doing a little bit of math. I've probably done some of this math on previous podcast episodes, but it never hurts to go over it again. So first I want you to consider what happens if you hire a lawyer and you pay them. And so to keep it neat, we're going to say you're paying them a $100,000 a year, 6 figure salary, a $100,000 a year.
• 3:52
  Now, wherever you are, whatever region of the country you're in, you'll need to make adjustments accordingly. But just know that whatever amount of salary you pay them, what you bill them at per hour is going to be adjusted as well. So for our example, we're going to say a $100,000 a year at the cost of employing them, you know, with all the added expenses of hiring an employee. And that can bring you to, let's say $120,000 a year. So if you live in a rural community in the Panhandle Of Florida, you might be able to get an attorney for $55,000 So you'll adjust, but you might not be able to charge a higher hourly rate for them.
• 4:32
  If you live in New York City, you might be paying, I don't know, $2.300000 for a lawyer. And you're also gonna be billing them out at a much higher hourly rate. So keep that in mind with these figures, adjust the math for wherever you are. So assume then that you bill that attorney that you're paying $120,000 or you're paying them a $100,000 a year and it's costing you 120. You're billing them out at an hourly rate of $2.50 an hour for a total of fifteen sixty hours per year.
• 5:03
  That's about 500 hours less per year than your average big law firm would require. So that's a very reasonable billable hour requirement. It would require your employee to bill about six hours a day, five days a week, and it works out. So $1,515.60 at $2.50 an hour is $390,000 right? Fifteen sixty hours a year times $2.50 an hour is $390,000 a year, which that means that the lawyer would be bringing in $390,000 a year into the firm if they bill the hours that are required.
• 5:39
  So you subtract that 120 that you're paying them from the $3.90 and what do you have? $270,000 is profit to the law firm. That's free and clear revenue for the firm. Now, obviously there are other expenses that are gonna come out of this as with all money in the firm, right? We're not looking at your expenses yet, right?
• 6:00
  But this is how much money that the firm is gonna make from having that lawyer. So now let's consider what would happen if you had three lawyers that were bringing $270,000 of annual revenue into the firm. Dollars 270,000 time three is 8 and $10,000 That's how much money comes to the firm after the attorneys have been paid but before other expenses. Now I know you flat fee billers are going to be protesting, but Devina, I charge flat fees. This doesn't apply to me.
• 6:27
  Well, it may not now, but it should. And I want you to think of it this way. Flat fees are what you charge the client. So this is client facing dollars. I charge them a thousand dollars and that's what we make to do this job.
• 6:41
  Where we're talking about flat fees, we're talking about client facing activity. However, when we look into the ownership and operation of our law firm business, we must ensure that that thousand dollars we're charging the client is going to be enough to cover the cost of providing the service to them for us to make sure that we're getting profits to the law firm from that amount of money. So unless you've done the homework, unless you know what it costs the law firm, they handle a specific type of matter, including not only the hard costs like overhead expenses, also the costs to pay your people, then you cannot accurately assign a flat fee to that matter. So you have to do some homework and make sure that flat fee is covering your overhead and your payroll and still bringing profits into the law firm. So flat fees, you may need to track time for a while, at least for a period of time.
• 7:34
  So you can understand if you are charging enough. One of the biggest mistakes that I see solo and small business law firm owners make is not if they're charging flat fees, they are not charging enough in flat fees for it to cover the costs, cover payroll and cover profits for the shareholders, right? So the math does apply to you, but you may be charging differently. You're charging a flat rate to cover that. Okay.
• 8:03
  This also may change as your law firm goes beyond you because you as a solo may make good money charging flat fees. But when you start to bring a team in and it may take other people longer than it takes you to do something, you've got multiple steps, multiple people involved in multiple steps, the flat fee that you're currently charging may not be enough to charge the cost of running a law firm business. So just take a look at that. So now for the revenue versus profit math, I want you to write this down. If you're someplace that you can, if you're out walking or you're driving, obviously don't try this, but if you're someplace that you can write this down.
• 8:41
  So let's say it does cost you more to invest in your law firm business for you to achieve a higher revenue. Okay, it will. I was meeting with a client yesterday and they are making, about a million dollars in give or take in gross revenue. And they're saying, oh my gosh, but look at our expenses. And they're looking at the profits.
• 9:02
  But when we dug into their expenses, we could see there were some places that because they were a little more flush, they were spending a little bit more money than they probably would have had they not been so flush, right? So that's like everybody's having lifestyle creep. You start making more money, you start spending more money. So it may cost you more money. It's going to cost you more money to make higher revenue.
• 9:24
  But I want you to consider this. Let's say your profit right now is 30%. 30% is a good profit. Okay. Some people will, you know, want to get 60% profit, whatever amount of profits you want, go for it.
• 9:38
  But I'm going say 30% is a good profit number. So let's say your profit is 30% of $1,200,000 right now. That equals $360,000 in profit. That's pretty good. That's a nice little bonus at the end of the year.
• 9:51
  Remember that you're gonna be taking a paycheck out of that 1,200,000. So you're getting a regular paycheck. This is just your dividends that we're talking about here, that $360,000 profit that's gonna go in your pocket on top of your salary. Now let's assume that you take on some additional expenses because you wanna grow your law firm to 2,000,000 in revenue. You know, you're gonna need to hire more lawyers, invest in different software, whatever it is.
• 10:17
  And let's say that your profit percentage drops to 25% instead of the 30% it was last year was 25% of 2,000,000, it's $500,000 So yes, the profit percentage is lower than the year before, but the total profit in dollars is considerably higher. It's 500,000 instead of $3.60. So if you do the math again, you've invested more money into your law firm business growth to get our total revenue up to $5,000,000 a year. So we have more lawyers, we have more practice insurance, we have more computers and equipment. We have a lot of more expenses, right?
• 10:53
  And so let's just say, now this doesn't have to be the case. The profits don't have to drop, but I'm just using this so you could see the math. Let's say our profits dropped to 20%, 20% of $5,000,000 What's that in dollars? It's a million dollars in profits. So while your percentage of profit has gone down, the amount of money that you're taking home and putting in your pocket as a bonus, as dividends is higher.
• 11:18
  So do you see that math? That's what I want you to think about when you're thinking about hiring lawyers, all right? The reason Wealthy Woman Lawyer training focuses on revenue as a goal, we say, we help you scale your law firm to and through a million dollars. A million dollars is just the first step that we want to get you to from that multi 6 figures or 6 figures up over that 7 figure, because we know there's a huge transition in who you are as a person and as a leader, and as a law firm owner from being solo to being someone who can create a million or multimillion dollar law firm. So that's the part where we're helping you to shift from just lawyer thinking to CEO thinking, right?
• 11:57
  And we use revenue because a lot of things can affect profits. A lot of choices that you make can affect profits. Some people choose to show lower profits because they don't want to pay higher taxes. So there's a lot of things that can affect profits. But we also think is that if you're making lower revenue, then you're not gonna have the resources that you need to invest to grow your business.
• 12:21
  So if you're not making enough money in top line revenue, if you're making a $100,000 in top line revenue, you're not gonna have enough money to easily be able to hire employees or invest in software case management or other software tools to automate some of your systems or hire a coach to help you achieve your goals faster. So the reason we focus on revenue is because we know that when you generate more revenue, you'll have more resources to make the investments to actually turn your solo freelance enterprise into a thriving, profitable wealth generating business that doesn't require you to be there every day, oversee it. So of course you can make a ton of money in revenue and not realize a significant profit. We see it all the time, but in most law firms that can easily be corrected with some analysis and looking at where your money's going, just like in your own personal finances. However, if you're not making enough money in revenue, those free expense dollars, you won't have enough cash to cover the cost of doing business to begin with.
• 13:29
  So I wanna use a personal sort of analogy that people are always telling you to invest, invest in the stock market, invest in real estate to become wealthy. But for people who are only bringing in $20.30000 a year in income, they may not have enough left over to invest in the stock market or invest in real estate. They may be barely covering their living expenses, their rent, their food, the needs of their kids, insurance or their car, the car payment, all of those things that are required for people to function in the world and in a capitalist society. So I always, you know, hated that when I was making that kind of money, I always hated when people would say, well, you need to put some money aside and invest it. And I'm like, I'm barely surviving here.
• 14:16
  So what I had to do was create more income for myself, more money coming into my life so that I could make those choices. It's the same thing with your business. You want to drive that revenue number up. You want to be making more money. So then you can make investments with that money and that will make you even more money, right?
• 14:38
  So that is why we focus on revenue. And I hope you've enjoyed today's episode. I look forward to hearing your feedback and your comments. If you've enjoyed it, please leave us a review on Apple Podcast. We so appreciate it.
• 14:52
  The more people we can get listening in, the more people that we can help. And I'm so happy that you are a listener of the Wealthy Woman Lawyer Podcast. I hope to see you back here next week. If
• 15:05
  Intro: you're ready to create more of what you truly desire in your business and your life, then you'll want to visit us at wealthywomanlawyer.com to learn more about how we help our clients create wealth generating law firms with ease.