Latest / Wealthy Woman Lawyer Podcast, Helping you create a profitable, sustainable law firm you love / Episode 307 | Profits, Pricing, and the Power of Your Numbers with Ryan Kimler

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Episode 307 | Profits, Pricing, and the Power of Your Numbers with Ryan Kimler · Wealthy Woman Lawyer Podcast, Helping you create a profitable, sustainable law firm you love

• 0:01
  Intro: Welcome to the wealthy woman lawyer podcast. What
• 0:05
  Davina: if
• 0:05
  Intro: 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. 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 6 to 7 figures in gross annual revenue so you can fully fund and still have time to enjoy the lifestyle of your dreams. Now here's Devina.
• 0:50
  Davina: Hello, and welcome to the Wealthy Woman Lawyer podcast. I'm your host, Devina Frederick, and my guest today is Ryan Kimler. Ryan is the founder of Net Profit CFO, host of the Net Profit podcast, and international bestselling author. At Net Profit CFO, Ryan and his team use accounting and finance to help law firm owners do one thing, have a growing and more profitable business. Helping law firm owners have a growing and more profitable business produces two big results.
• 1:17
  One, your law firm has enough cash to grow and maintain strong financial health. And two, your law firm produces enough cash for you as the owner to fulfill your wants and needs. Please join me in welcoming Ryan to the show as we discuss the ins and outs of all things law firm finance. This is an information packed episode you don't want to miss. Hi, Ryan.
• 1:40
  It's good to see you today.
• 1:42
  Ryan: Yes. Thank you for having me. I am excited to be here and excited for the show today.
• 1:46
  Davina: I'm good. We're going to have a good conversation. We have a lot that we can talk about today. I have introduced you, but I would like for you to tell us a little bit more about how you made your way to being this CFO for law firm businesses. You didn't grow up as a little boy saying, one day I'm going to be a CFO.
• 2:08
  So what happened along the
• 2:10
  Ryan: Absolutely. Yeah. So, obviously, I have a background in accounting. I have a degree in finance as well and my original plan was to sit for the CPA. I'll make this as quick as possible here.
• 2:21
  And that's why I got both degrees. So, I had one hundred and fifty hours. Could sit for the CPA and when you're going to sit for the CPA out of school, what you do is you go and work for a CPA firm and our CPA firm is doing the normal stuff, bookkeeping, compliance, general ledger entries, tax, and we were doing it for small business owners and you know, this is where I really fell in love with working with small business owners and really got asked the question, you know, it's great. You guys produce our financials but what would be really helpful would be if you would help us grow our business and make our financials better so that we can make more money and keep more, right? I'm kind of paraphrasing but those are the kind of questions that I got.
• 3:07
  And I was very early in my career, did not have great answers to that question at all but definitely lighted a fire inside of me and realized that business owners really need help with their finances and really need that accounting expertise that can advise them that a lot of accountants got don't go into and do. So, fast forward several years later, moved on from the CPA firm, waited out my non compete, went corporate, really worked with the CEO very, very closely at a big company. We were over $100,000,000 in revenue and just they had more resources. Things were easier. Didn't need the same help from my experience that the small business owner needed.
• 3:52
  I knew I wanted to launch my own firm and so, I got back into working with small business owners by launching my own firm. Found a great CFO training organization along the way. I was always looking for mentors to help me with answers to the questions that I had that I didn't have answers for and launched my own firm and now today, you know, exclusively with small business owners as their CFO and helping them with their numbers. And it's work that I love to do.
• 4:24
  Davina: Good. Good. I'm so and I and I love your story. I love how you really found something that ignited a passion in you, because most people probably think accounting is not something that would ignite a passion. But definitely loving if you have that entrepreneurial mindset, loving the small business owners and understanding the help they need.
• 4:48
  One of the things, that I think is confusing for a lot of people is that, well, I have a CPA and my and then they get to the end of the year, the CPA helps file their taxes and the c and then they CPA says, you should have done this, you should have done that. And they're wondering why didn't the CPA tell me this before? Have you heard that?
• 5:11
  Ryan: For sure. Or they go or my favorite also is, you know, you go in, you meet with your CPA, and they're looking at the tax return and they're like, oh, you had a great year. You had this in profits and you owe this in taxes and the business owner in their mind is looking at their bank balance like, where's all the money from that though, right? Yeah. And then, you have a tax bill and sometimes you're prepared for it, sometimes you're not.
• 5:36
  If you're not, those can be some of your worst days in business, I think but yes, I hear that a lot for sure. Yeah.
• 5:43
  Davina: Yeah and so, really, what role you play in that is not not, it's not specifically tax strategy but it is more like, where is our money going and what are we doing with it? Is it going where we want so that we're maximizing profits, minimizing taxes, whatever it is we're trying to do with our business. Is it actually doing that? And I think one of the things I've encountered a lot, and I'm sure you have too, is small business owners, and we're talking specifically here about law firm owners. There are a lot of us who don't know how to read financial statements, even the most lawyers go through law school, we learn, you know, how to be lawyers.
• 6:25
  It's very detailed, challenging work. And yet when it comes to reading our own financials and interpreting them with the, viewpoint of growing our business, that's something that's kind of foreign to us. Is that something is that what you encounter as well?
• 6:41
  Ryan: For sure. Yes. A lot of what I do, know, while I am focused on helping business owners really look forward and plan for the future, A lot of it along the way is that education piece and helping business owners really understand like, okay, if I pull this lever financially, how does it impact my end results And that those end results really show up on the financials that you're talking about and really educating them on the numbers that are there, what they mean, and how we can make those numbers stronger and have the business be stronger financially. For sure. I spend a lot of time doing that.
• 7:23
  Davina: Right. Because I think there's a, so I know so many people I encounter, they don't even want to look at it. They don't really understand it. They don't want to look at it. They just want to know that they can write themselves checks out when they want to and do whatever it is they want, go on a trip or whatever.
• 7:39
  What do you think the number one mistake you see small business owners, particularly law firm owners make when it comes to their finances?
• 7:51
  Ryan: Yep. Number one for sure and the two are tied hand in hand together. But number one for sure is pricing and payroll. Without question, you know, as you go to hire and grow your team, a lot of times, you don't raise your prices enough and you know, for business owners, I think some of it is a mental battle and confidence in if I raise my prices, I'm not going to lose all my clients. Some of it is also just not knowing and understanding how that flows through and affects your payroll and your hires.
• 8:28
  There was a study Forbes Small Business for '24 for the average small business labor is 70% of sales. 70% of expenses is labor for on the average business. Huge, huge amount, you know, ratios wise, right? If if we're saying that sales is 100 percent, labor is 70, that leaves 30% for you to pay everything else.
• 8:53
  Davina: Right.
• 8:54
  Ryan: All of your overhead, market, and advertise, and have profits, right? And so, you know, for the business owners that I work with, we are definitely targeting for way less than 70% payroll and hands down, those are the things that business owners that I work with struggle with and have challenges with and especially in the marketplace today, where hiring can be tough.
• 9:20
  Davina: Right, absolutely. I know there's like, you and I talked about the, percentage of, of employment, the employment rate in the legal industry. I would say it's less than 1%. And you told me it was
• 9:35
  Ryan: Point 04% right now.
• 9:37
  Davina: Point 04%. So if you're having trouble hiring lawyers right now, this may be why. It may not be a you thing. It may be because the unemployment rate in the legal industry is 0.04% right now. One of the things I think that makes law firms unique is their ability to, and not every law firm, obviously there are some that work on contingency and some do flat fees, but the ability to, predict your profits based on who you hire, hiring lawyers, hiring paralegals, because we can directly bill them for the time they work.
• 10:14
  And there's a margin there for us, to make a really nice profit if we do it correctly. So hiring, while I think a lot of people sort of focus on how much that payroll is, on the flip side of that, oftentimes people don't look and go, well, how much are these people making for me and where they miss out? I and I'm shocked by this. I see this a lot, with law firm owners who are in the early stages of their business. They don't have a good handle on how that lawyer makes them money, how many hours they should be billing, what I should be charging them out out at, and then also setting that clear expectation for that lawyer that it is their job to bill those hours.
• 11:01
  What are you seeing when you're dealing with attorneys and and and they're hiring and everything? Are you seeing the same sort of thing?
• 11:08
  Ryan: For sure. Yes. One of the big things that I help with is staff productivity and efficiency. We're always looking at, you know, what are the annual hours expectations that you have of the lawyers and paralegals that you have on staff and then, we've gotta have reporting that we can look at and compare and see, well, who's hitting their numbers and who isn't and if someone's not hitting their numbers, why are they not hitting their numbers? Are there, is there not enough work?
• 11:36
  Are they not billing in the right ways? Are they not capturing all of their time? We dive into that extensively because you're right. I mean, it is a very, very good opportunity to be able to hire and then kind of forecast forward. Well, how much work do I need to bring in?
• 11:52
  And how much revenue is that lawyer going to bring me in when they're doing their work properly and when they're doing their hours properly. So, yeah, I mean, we spend a lot of time reviewing attorney productivity. In some cases, I found some firms where contract attorneys only had utilizations of like 50%. So, well, a firm thought they were paying a contract attorney one hundred dollars an hour. Really, you're paying them $200 an hour because their utilization rate is so low that they're billing you for two hours for every hour that they actually gets on a client bill.
• 12:29
  So looking at things like that, super, super important for profitability and sustainability. Right,
• 12:36
  Davina: right. Growth for growth as well. Because it can be very limiting if you're paying way more. If you're not making a profit on somebody, then what is the point, Right? Because that is what we're that's what we're doing.
• 12:48
  And this does apply to people who charge flat fees as well. For those of you flat fearers out there who feel left out, one of the biggest mistakes I see with people who charge flat fees is they haven't done the math. Yep. To see if I my flat fee is going to be significant enough to make us a profit if somebody on my team does something instead of me. Or if I'm doing it, what is that flat fee gonna look like?
• 13:12
  A lot of people who, get into flat fees kind of says, this is sort of what the market will bear. This is sort of what's going on in the market. It's a feeling rather than an actual fact. When you're helping clients with that, what are some of the challenges you're encountering around that and some of the solutions you're helping them with?
• 13:33
  Ryan: Yep. So, I actually think working on the flat fee side is probably easier to project, right? So, my first question is, okay, if you hired a lawyer, how many flat fee cases can they complete in one month? Right? And we we look at what that number is and I'm just gonna throw out a service that's commonly flat rate.
• 13:52
  I'm just gonna say estate plans because those are commonly flat rated. Okay, let's say, you know, lawyer that you bring in, they're a little bit less experienced as you as the owners. We know they're not be as efficient as you but they crank out. I'm just gonna throw out round easy numbers. 10 estate plans in a month, right?
• 14:09
  That helps us get down to, well, how much revenue are they really accounting for and generating? Now, a lot of times in an estate plan, there's probably a paralegal that does some work as well. So, we've gotta kind of factor that in but if you can get down to what's a gross number, right? 10 estate plans at $5.00 a piece. It's $50 of revenue, right?
• 14:32
  Contributed to the business, then, we can start to look at what you're paying that attorney and what percentage your labor cost is on those flat fees and so, I think flat fees can be easier to calculate from that standpoint, the hiring standpoint. I still think it's important to track hours even if you're doing flat fee work from a management standpoint, it really helps you see inefficiencies in the staff that you've got like why is an attorney, you know, maybe a standard estate plan takes four hours and you see that one attorney that you've got is always putting seven hours down. Well, why is there that gap, right? Being able to see things like that is really going to help you with productivity even if you're just billing on a flat rate and so, we definitely work on those kind of things for the firms that I work with that are doing flat rate billing but the other thing that's really nice about the flat rate billing firms usually they have those flat rates sitting in their trust account and so we can always look at their trust account balance We can look at how much they're transferring every month and we can kind of see in the future like, if you're making consistent trust transfers and let's just say, again, easy round numbers, it's 100 ks a month.
• 15:50
  You know, and then your trust balance right now is sitting at $50. We know that you better go generate some work, right? Because there's no way you're transferring 100 ks next month, right? Yeah. So, being able to track that and what your work in progress is going to be can be really helpful.
• 16:06
  And that really goes for the hourly and the flat fee side as well, but more so for the flat fee side.
• 16:12
  Davina: Right. It really is, your numbers are really telling a story and I don't think enough people are looking at them, trying to hear the story that they're telling, you know, until they get in sort of a crisis situation. And they're like, Oh crap, we just realized we have a problem. I want to talk about your, you, it's really interesting to me that you said pricing and hiring together. It's a, like they go like salt and pepper, they go together pricing and hiring.
• 16:41
  Because I think most lawyers I talk to, they don't think in terms of pricing and hiring. They think I charge this because I think this is what somebody with my years of experience can charge. And when I hire this new lawyer, I, I don't want to set them at my same high rate. I want to set them at a lower rate. And, and I think about their number of years experience and I sort of attach this value to it.
• 17:10
  And there's not a lot of thought beyond that. And and it's certainly no people, generally speaking, aren't connecting those two that high pricing and hiring together. Why do you think that is important for us to start looking at it that way?
• 17:26
  Ryan: Yes. So, number one, if you're not priced right and you're not going to make enough margin on the people that you're going to bring in, it limits what you can offer people salary wise, right? So, you know, I'll give an example. Let's say that you are at an hourly bill firm and let's just say, you know, around easy number that's pretty standard in the industry is let's say, you expect your attorneys to bill fifteen hundred hours a year. A $10 price change is $15.
• 17:59
  Up or down, right? For the year. So, you know, I want to give your audience just a few seconds to think about that, right? And and let's just say, let's just say that we're shooting for payroll to be 33 right? There's that old school rule in legal like a third goes to payroll, a third goes to overhead, and a third goes to profits, right?
• 18:23
  So, a change in price by $10 which changes $15 over the course of the year is a difference of $5 up or down on what you can pay your attorneys and your people, right? And so, you know, that's, again, and I think to me, a $10 price change is small. Right. I think, I think most likely, you know, probably every law firm listening to this podcast, you could raise your prices today $10 and I would about bet you, you're going to see zero change in the number of cases that you're sizing, signing.
• 18:58
  Davina: Right. Right.
• 18:59
  Ryan: And probably zero change in conversion rate, most likely, right? I mean, I could be wrong but it's so small.
• 19:07
  Davina: Why not try it and see, right? I think you're, well, and I will tell you as a perspective of a client, I've hired many attorneys through the years. I think I've hired more attorneys since I've been an attorney, because I know now what I don't know. But it there when if you have a a sophisticated client who's paying you, who's paying you your rates and that kind of thing, they're they're expecting that there will be some sort of, fluctuation in in prices over time or or whatever if you're dealing with people that are repeat sort of businesses. And then if you're just saying, okay, I have a contract for this, I can't change these current clients.
• 19:46
  What I can do is with the next new person that walks in the door, this is now my rate. I've had a lot of my clients do that. I just say, the next conversation you have, this is now your rate. And it like, they're just flummoxed and shocked that it's so easy to do that, but you really literally can do that. And it's a, and they don't even respond to it.
• 20:07
  It's not even a bump in the road. Like we think we build it up into our mind, but that whole idea of being able to pay your people more, get better quality people, give the people who work for you a better quality of life, all of that tied to just a little bump in rates. And also, you also can put a little more in your pocket that way. It's a huge, huge driver of revenue and profitability is like, you just can make that tweak in your, in your pricing. And I think that's a, a lot of women law firm owners sort of say stuck around that with a lot of beliefs around what you talked about.
• 20:42
  Won't be able to get clients. You'll actually, I argue, you actually get better clients. You get better clients. I don't know if you've ever had the experience yourself, but I've had the experience in both my law firm and other businesses that sometimes the one that you're doing the biggest favor for is the one that is most difficult to work with, most challenging. Whereas the ones who like, this is a business arrangement, I'm paying you X to do Y, not as demanding.
• 21:09
  So I think you get better clients if you make those tweaks.
• 21:13
  Ryan: I agree with
• 21:13
  Davina: When you're making those decisions, when you're helping clients make those decisions, what kinds of things are you basing fees on? Because are you doing it based on a feeling?
• 21:28
  Ryan: Nope, I am not. I have a mathematical equation that I use. So best and easiest place to start is going to be because everybody can relate to this. It's going to be hiring an attorney brand new out of school. So, very, I'll say very little experience.
• 21:45
  I'll say zero to two years. On this type of an attorney, we should expect in billings five X of what their salary is. So, I'll give you, again, example, round easy numbers. Let's just say salary in your area for a brand new attorney like that is 100. Our expectation should be that they should bill 500.
• 22:07
  So, then, I dive into, well, is that even reasonable at our current rates? So, I typically start, you know, and I divide by forty nine weeks. Okay, that means $10,204 a week. If we're billing at $400 that means twenty five hour, twenty five and a half hours a week. Can they bill twenty five and a half hours a week?
• 22:28
  I would say, yes, that's reasonable. So, 400 is, you know, probably good enough that, you know, could it be raised some maybe but twenty five and a half hours a week is doable, right? The reason why I start with five X with the brand new attorneys is as an attorney gets more experience, you're going to raise their salary and they're also going to start probably spending time generating cases and so the number of hours that they can spend actually billing is probably going to decline along with you're paying them more in salary and so a five X return on a brand new attorney is going to be your strongest return that you're ever going to get and then from there, I kind of have a sliding scale that goes down to three and two X returns. You know, if you have more of a partner type attorney that's generating a lot of work for the firm, they're probably more of a two X because they're spending a lot of time client facing consultations, generating business, that means they have less hours to bill and you're also going to pay that attorney a much higher rate, right?
• 23:35
  So, attorney like that, maybe their 200 ks base salary a year, it would be really hard for them to bill a million dollars, right? And get that five X return on that 200 ks and so. Right. You've got it now and so, you know, that's kind of the pricing side of it and how I kind of set it up and kind of the structure and then, you've gotta have good balance, right? If you've got a firm that's full of partner like attorneys and you're only getting two X returns, your profits are going to suffer.
• 24:05
  That means, payrolls, if you're getting two X returns, that means payrolls probably approaching 50 or better of the revenue that you're bringing in. So, there's gotta be a good balance between the folks that you have on staff that are two X that are generating business and the newer attorneys that you've, you know, got on staff that you're just bringing on that are producing more of like a five X then you've got a place in the middle that's your experienced attorneys that aren't generating work yet and they're like your three and threes and fours return. So, there's gotta be good balance. You can't have too much of one position in the firm or it'll affect profitability or work product.
• 24:43
  Davina: Yeah, yeah. I think one of the challenges with new lawyers though, with baby lawyers, we'll call them that. Yep. Is that a lot of clients when they first start hiring lawyers, the reason they're doing it is because they don't have time. And so hiring a baby lawyer is not going to fix that problem, it's going to increase that problem.
• 25:04
  They're going to wind up working more. I kind of generally recommend that three to five years as a sweet spot. Yep. Or if that is your problem. Now, if you've already hired and you have some attorneys, other attorneys who can help with the training and take some of that off of you, And that then that starts to make sense to say, okay, we can stack up some baby lawyers and we can pair them up with people with a little more experience to transpose a lot of considerations in that.
• 25:30
  But I love the numbers. I love you sort of breaking down the numbers for us because I think that's something that, often we're not doing. We might, you know, we're just not sitting and thinking with that math hat on because most lawyers will tell you they became lawyers because they don't do math. But I might, you'll always hear me say, it's business math. You can learn to count your coins.
• 25:50
  You can learn business math. If you went to law school, you passed the bar, you can learn business math and you hire a good financial team. So tell us, we're gonna segue a little bit here and talk about who the financial players are that we should be thinking about hiring and in what order. Like, who should we have on our team, on our financial team, first and foremost? And I'm talking here probably vendors.
• 26:16
  Right? We're not hiring these people in our law If we're small law firms trying to get over the million, get into the multiple million part. So who's on our financial team and who should we hire first?
• 26:30
  Ryan: Yep. So, in my book, I talk about four financial positions that you should have on your team. First one, I'll talk about because I think everybody knows what they do is you should have a bookkeeper. Your bookkeeper tracks all of the transactions that happens in your business. So, all the money is coming in, all the payments that are going out, and when they get done, you should kind of have like some draft financial statements from them.
• 26:53
  Again, I I I agree with you. I think that's a vendor, right? Probably outsourced. Look for a firm that specializes in legal. They're definitely out there.
• 27:01
  There's a lot of them. That's the the beauty of COVID and remote these days, right? So, that's probably the first position and I would say, if you're doing 6 figures a year, if you're a solo out there and you're 100 ks plus, go hire a bookkeeping firm, right? Take those hours off of your plate. Take that stress off of your plate.
• 27:20
  It's not in your wheelhouse. You probably dread doing it and there's also opportunity cost to it, right? What, how many new cases could you go out and sign if you weren't doing your bookkeeping, alright? So, that's position one. You should have and you should have them very very early.
• 27:36
  Position two should also be happen very early. You should have someone to do your taxes. That could be a CPA. It could be an EA. They don't even necessarily have to have a designation.
• 27:46
  They obviously need an accounting background but someone to do your taxes, keep you compliant, that should be on your team. It would be really, really great if you had somebody to work with you on some tax strategy to help you, you know, reduce the amount that you're paying in taxes but don't necessarily have to have that person from the start. That's probably later down the road as your business really grows and your income grows and it really becomes a problem. When you get into higher tax brackets of 35%, that's where you can really see some savings. Third position that I'll go to and this is one that most attorneys and law firms and most business owners really miss is you should have someone to help you with retirement.
• 28:30
  Doesn't have to be an official like financial adviser. There's a few criteria that I always put out that I call for a retirement adviser. It's not someone that just pushes one product. I think we all have met somebody that just pushes life insurance. They can, that can be a great vehicle but that doesn't fit everybody.
• 28:49
  So, retirement adviser is someone that you trust that is going to help you retire in the way that you want to retire, right? And and I would bring this person on sooner rather than later, okay? A lot of business owners, again, miss it and I wouldn't be banking on a big, massive exit from your company. That doesn't always happen and that's not always going to be where your retirement is funded through and so, I would say, as you start building that team, you start reaching that half million dollar mark towards a million dollar mark, you should start bringing in that retirement adviser and really getting their advice and you know, have a plan for you, for yourself as a business owner and what does it look like to start setting aside some money and things like that. And then the last position is really a part time CFO, really like myself or my firm, and you should again probably look to hire us as on a fractional basis or a part time basis as you pass that half million dollar mark trending towards a million and beyond and you know, our job is really to help you be strategic with your firm and with your finances, help you forecast forward so you can see where we're going, right?
• 30:07
  Help you analyze your hires, making sure you're priced right, making sure you have strong profits, strong cash flow, making sure your business is healthy. Those are really the four positions that that I talk about in my book that I think you need on your financial team at a minimum. You know, you can add more to that later, but those are the four core positions that you really need.
• 30:32
  Davina: Yeah. Yeah. I wanna talk about the retirement because I actually did a podcast episode, something like the people that, the dirty word that no attorney wants to talk about, it was retirement. Because I have a lot of people who are sort of a little bit younger that say retirement, I'm not ever planning on retiring. I'm gonna be a lawyer.
• 30:53
  The joke is lawyers don't retire, they just die at your desk. But a lot of people have this idea that I'm not going to retire. I'm always going to keep my finger in the pot up. I was going to work. And to that, I always say, when you get to be in your 50s, you're going to look at that very differently.
• 31:11
  And when you get to be, you know, my parents are in their eighties and I see their inability to come anywhere close to the things that I can do, right? At my age and people who are doing things at 30 that at this age, I'm like not interested in, right? So even though you may not think it will ever happen to you, that you will ever need money for the future, that you should not put off to tomorrow, which you can do today, like travel internationally, there you need to also be balancing that out with thinking of your future self. What does my future self need? When I may not be able to work at the, or may not want to work at the pace that I am now.
• 31:54
  Right? So let's just protect your future self. Then we got some people who will tell me, well, I'm 30 and I wanna retire at 40. That's a whole different ballgame. Right?
• 32:03
  It's a you really need a different you need a much more aggressive financial plan if that is your plan. Because you think about it, if you retire at, let's say, you know, 60 and you live to 90, which many people are doing, that's thirty years that you've got to have some, you know, income and what's that gonna look like. And we think we'll be able to work part time, but we might live in a world where, you know, nobody hires us at that age, especially with the way things are changing. So I echo what you're saying and support what you're saying. That is definitely somebody that we need to have on our team.
• 32:38
  One of the things I look back on it with the hindsight of somebody who's in my 50s and say, Man, I wish I had listened to all those people who talked to when I was in my 20s and said, if you would put away this per week or per month. So very, very important. So tell me what indicators other than where we are revenue wise should be waving a flag that a CFO might, it might be a good time to invite a fractional CFO or part time CFO to help us. What are some of the things that like when we start seeing these sort of indicators that we should consider that?
• 33:21
  Ryan: Yep. So, some other indicators, I would say, probably for your next hire, right? Let's make sure that that's priced right. Let's make sure that you can give a good offer especially in the marketplace that we're at today. I would say, if you're, you know, leaving your CPA's office and wondering like, where is all the money, right?
• 33:42
  And and why didn't I make some changes sooner? Those are definitely triggers for CFO and and I would say, you know, if you're in charge of a small team, right? Like, you're in charge of their job, they're providing for their family. You know, that that's also a good time to, you know, really be triggered and and bring on a CFO so that you've got that financial stability and you know that, you know, you're not going to have to lay anybody off. You know that, you know, you've got a good plan moving forward.
• 34:12
  If you don't sit down and do a strategic plan every year and really look beyond sales. It's not just about cases and sales. It's about, you know, what is my total budget next year for marketing and advertising? What are my total profits next year going to be? If you're not getting down to that level and having that sit down with a financial professional or even just by yourself to go through and or with a coach, right?
• 34:38
  And and go through and go through those numbers. Those are red flags that I would say, you know, it's it's time to start looking at bringing someone into your life that can help you with those things because I think it's important to have a plan and be prepared, right? And who knows what could happen? I think COVID just a few years ago is more evidence for that than anything.
• 35:04
  Davina: Right, being prepared for something that you didn't even know you would ever have to experience. You can also help people, so you kind of hinted at this, but I'd like to talk about it a little bit more. I think generally when people think CFO, they think, or fractional CFO, they think, oh, here's a retainer I have to pay every month. But you actually have, for smaller firms, you actually have some sort of way of working with them for projects, like you mentioned planning or something like that. Can you tell us a little bit more about that?
• 35:39
  Ryan: For sure. Yeah. So, I do a lot of compensation plans, put helping attorneys put those together. Again, in a way that's really profitable for the firm and also reviewing and looking at, you know, is this going to be competitive in your market space? Is this really going to give you traction when you go to hire, right?
• 35:58
  And then, you know, so that's really going to help. Again, that's kind of more of a project based thing but at least, you know, while we do that, you've got some guidance and you know, from a numbers perspective, it should work out for you so that it's a financially strong hire that works out and you can keep long term. So, that's one thing that's that's really helpful that I do. The other thing is I've got a financial assessment tool that I will use on a project basis and that's more of like what a CPA does in review. It's a it's a look back at the last couple of years.
• 36:30
  Look at your trends in a little more in-depth way looking at your profitability and your cash flow and you know, giving you some changes that you can make out of that. So, that's again, more of a couple project based things that I do with some smaller firms as they're growing and kind of getting to that million dollar mark for sure.
• 36:50
  Davina: Yeah. Yeah. When you're talking about marketing, can you give me some idea of what you generally see percentage wise that successful firms are investing in their marketing, because this is an area where I think a lot of us, by and large, I think attorneys bootstrap, like we start out bootstrapping, we pay for it all along the way. And there's no VC funding here. Right?
• 37:23
  And so one of the things that I hear a lot of lawyers say is, well, I get a lot of referrals. Right? After they've been in business for a few years, they're getting a lot of referrals. And they might not be thinking that they need a marketing system that is independent of them as an individual person if they're wanting to grow a larger law firm. And and some of them, you know, we start looking at the marketing numbers and they're like, oh, I'm not even spending 5% on marketing.
• 37:50
  Right? Yeah. So what are the kinds of numbers are you seeing for successful firms that they're investing in marketing?
• 37:58
  Ryan: Yep. So, I would say it does really depend on your practice area. I think some practice areas are more competitive than others specifically probably talking about personal injury and contingency cases but let's set those aside for a minute. Let's talk about, you know, more general areas of practice. I think for firms that really want to grow and gain some traction, again, that are probably in that, you know, 6 figures, 5 hundred ks to 5,000,000, let's call it.
• 38:27
  10 to 15 percent typically of sales to a mark of you know, planned out marketing budget. It's not, you know, oh I'm going to randomly sponsor this thing, right? It's, you know, planned out marketing activities that we're tracking. We're making sure we're getting a good return on. Maybe that's an agency or a part time marketing officer to come in and help us when you get a little bit bigger.
• 38:51
  1,000,000, 2 million, dollars 3 million plus. But typically, if you really, really want to grow, I'm seeing, you know, 10 to 15% marketing expenses. That's really what it takes.
• 39:05
  Davina: Yeah. Yeah. So key performance indicators are something that we often talk about, in growing our business. And I have my favorite, but tell me your top three, let's say, key performance indicators that you're like, the very things that you're gonna zero in right away and look at. What are those?
• 39:30
  Ryan: So it's probably not a shock to you, but pricing and payroll obviously are are in the top two there of the three, right? So, from a payroll perspective, here's what I always tell my firms to look at. If you take your total payroll cost. So, this is adding in wages, taxes, four zero one ks, and retirement benefits that you have at your farm, health insurance, workers' comp insurance as well, right? And and you're, if you ask your bookkeeper and you list those categories, they can probably help you group those together so that, you know, in your profit and loss, it sums up those numbers for you so that you don't have to do the math.
• 40:10
  You get down to a total payroll number. I divide that by revenue and my I and this is this is with the owner on payroll at a at a reasonable salary. You should be around 40 to 45% payroll cost. So, that's one key performance indicator that I always look at. If you're higher than that, you probably have an imbalance of employees, meaning, too many people giving you a two extra turn instead of a four or five or you're priced wrong.
• 40:45
  And so then second key performance indicator is definitely ties the pricing, right? And again, kind of the math we talked about earlier. Can we achieve a five x return on a new lawyer, right? And then, doing the math the rest of the way through, right? And then, third key performance indicator for me is probably where your bank balance is, right?
• 41:09
  I think if you set things up correctly as far as on the pricing and payroll, you should be able to produce strong profits and from that, then, let's look at what is your net cash flow every month. So, if you have debts that you're paying on a regular basis, if you have uncollectible accounts that you've build and you're not bringing in, let's take those out, right? If you have client costs that you're paying for, let's take those out but let's and let's really look at every single month. Are we producing positive cash? Because if you are, that helps you avoid a lot of problems.
• 41:47
  If you're not and you're starting to eat into those cash reserves, why is that happening? Are we inefficient and we don't have enough profits? Do we have too much debt and we're sucking up too much cash? I mean, there's a lot of problems that could go into it but I really want to look at, you know, what are we doing month over month? Are we growing the bank balance?
• 42:09
  Cause that's going to give you security, that's going to help you give a longer runway that if sales stopped today, you could pay your bills for a longer period of time. Right.
• 42:18
  Davina: And really be having, what should we have in retained earnings? Like what should we have in a cushion?
• 42:24
  Ryan: Yep. So, I
• 42:26
  Davina: The formula for that?
• 42:28
  Ryan: Yes. So, for starters, I love to build law firms to three months and I and I think that's a good minimum number. I understand, you know, in in more recent, like, you know, if you would have asked me that in 2020, '20 '20 '1 when we had really low interest rates and you know, you couldn't go out and and get some low risk investments at high interest rates like a municipal bond or something like that. I would have said, shoot, build it to six and let it sit there, right? You're not hurting anything.
• 42:57
  You're missing out on 2% interest, right? Now, the last couple of years, while we've had higher interest rates, I do cut that number back a little bit because I understand that hopefully, you know, if you've got, if you go out and invest in like a mutual bond or something like that, maybe you're making, I'm just going to throw out 8% on your money. That's better than having it sit in a bank account probably and make three, okay? So, I can live with that and if you've got it invested in something that's tradable like that, then, if you needed it, you could probably get to it. You might take a little bit of a loss on the interest but so for that reason, the last couple of years, I've cut it back to three but that's where I love to get law firms is three months and that could be sitting in the bank.
• 43:43
  I'm also not opposed to using a line of credit, you know, to get us there as well. I mean, hopefully, we can go out and get that and have it sit at a zero balance, you know, and not use it but at least if you have that cushion there and you have to use it, much better to use on a line of credit than go out of business. So.
• 44:02
  Davina: Yeah. I always tell people it's a psychological safety net. It's psychological safety net to know because a lot of people get are reluctant, especially when they first start hiring lawyers, they're reluctant to hire because they have fear around will I be able to make payroll? And there's all kinds of little tricks that I sort of share with how to deal with that mindset issue. But one of them is having that psychological safety net of knowing it's there.
• 44:25
  So you won't be embarrassed, you'll have enough time to make it action plan, or whatever. So I think that is very helpful. The last sort of thing I want to talk about is owner compensation. Because this is another place that I see as a sticky wicket for people. So many people are just taking money out of their business like it's their open season on their bank account, right?
• 44:49
  And they're, they're, taking that money out, maybe not in the way that they should be. So it's very common for lawyers to say, well, I take distributions, but then there's no, rhyme or reason to it. It's kind of, I've just taken money out when I need it. And one of the mistakes that I see more frequently than I would expect is a CPA is not telling somebody that you're being taxed as an s corp, and therefore you must pay yourself a reasonable salary. And if you're making over $50,000, likely your CPA is saying you need to be taxed as an s corp.
• 45:29
  And that means you need to pay yourself a reasonable salary. By that, I mean w two. What kinds of things are you seeing with regard to, owner compensation, how people are doing it, and maybe some little things that they need to be thinking about that is a mistakes you're seeing people make.
• 45:46
  Ryan: For sure. Yep. So, I'll tell you the best system that I love to put people on. Number one, I will tell you, I do not like the Profit First system but there is one thing from it that I do really like and that is setting aside about 15% of sales for taxes. I do really like that.
• 46:06
  You know, have a bank account where you're stashing some money. For to pay your tax bill because that is gonna come and one of the worst problems you can run into is a business owner that's not prepared to pay their tax bill and the IRS is probably the last organization that you wanna owe money to, Alright?
• 46:23
  Davina: Well, I would say to you too, I mean, well, like one of the things that you can just log on to the IRS website and just prepay sub like so it increments. You can just go there and say, I know I I know kind of like where I'm going to be. So I'm just gonna go in the first quarter and pay some money. Second quarter, pay some money. I mean, it's super easy to do now.
• 46:45
  They're always a little behind in updating things, but the money's there. They know it's there. So you don't even have to separate it, like the Profit First. You don't even have to separate it in a bank account, bring it back. I tried Profit First.
• 46:58
  And I, I understand like, like his, you know, his way of he he's taken something that people have been doing for years, like putting things in an envelope, sort of parsing out, but he's using bank accounts to do it. But I found for me that really most of the things that he's talking about really kinda need to come if you're a pastor, like, they really need to come out of your your personal income. And so that I wound up moving a lot of things and creating different accounts through my personal more so than through my business. To me, it was and you also had to pay the accountant a lot more money because the accountant had to balance each one of those accounts. Yep.
• 47:37
  So, not to throw shade on him, but I do think there's better ways to do things. So, anyway, you
• 47:44
  Ryan: were So, yes. So, do that, right? Pay pay your taxes. But the best thing that I love to do is put the owner on a salary that covers their living expenses and gives them a little bit of a cushion, right? Because we all are going to have those things where I got a flat tire, I need a new battery, I need a new set of tires for my car, right?
• 48:08
  Or my air conditioning went out of my house, right? We're all going to have those things and so, I love to put business owners on a reasonable salary that they can pay their bills and have a little bit extra and then, as the business does well, let's set goals and let's pay out bonuses for hitting those goals and as the business does better, obviously, you can pay yourself more money because I will say if you don't have your personal finances in order, it can absolutely wreck your business and so, that's the system that I love to set owners up on and then, you know, when it's bonus day, that that's a fun day and.
• 48:49
  Davina: It is a fun day.
• 48:50
  Ryan: You know, when you when you live life at, you know, because again, you know, if you're taking a higher salary, you will find a way to use the money and it'll be gone and you know, you'll look up and like, I don't have any extra money to go on vacation, right? Versus, if you, you know, live on your means with a little extra money for emergencies, then, when bonus day hits, it's like, this is an extra lump sum payment. Now, I can take it and go do something fun. I can go on vacation or maybe you're looking to upgrade your car and you can use that as a down payment to upgrade your car, right? Whatever the case may be But that's the system that I like to use.
• 49:31
  And then obviously, you're rewarded when you perform. And as an owner, you get to cut yourself a bigger bonus payment.
• 49:40
  Davina: Right, right. Lastly, I want to just hop back to something you said earlier, when we're talking about retirement. And you said not counting on having a big payout at the end. Tell me a little bit more about that.
• 49:56
  Ryan: Sure. So I think from my experience, and this is not just lawyers and owners, this is all business owners. When we build a business, and this includes myself, right? Our business is our baby, right? Right.
• 50:07
  For a lot of us. And we think the world of
• 50:11
  Davina: it.
• 50:11
  Ryan: And you know, we think that it's worth X dollars and you know, it doesn't matter what that number is but a lot of times, we think that it's worth more than it actually is versus if you, you know, went to a broker or went to sell your business, the dollar figure that you're actually going to get for it, what it's worth on paper is a different number than what we believe that it's worth because we have, you know, our heart, sweat, and tears into it, right? And so, you know, I just like to prepare owners for the number that you think like if you're, you know, building a business and the number that you think you might get and then you're going to sell it, you're gonna get that number and sail off into the sunset and live happily ever after might not actually happen, right? And I think just being prepared for that, right? And and really knowing what it's worth and knowing, you know, some businesses don't transition at all, right? And there is no lump sum payment or there is no buyout.
• 51:17
  You know, you really have to build the plan for new partners to come on and kind of, you know, take it over or maybe you get an external sale done but there again, like with a lot of law firms, naming and branding wise, sometimes that doesn't always work especially if it's your name on the door. So, you know, it's just, you know, be prepared for not getting the number that you think and don't.
• 51:44
  Davina: And then if you do, that's a bonus, right?
• 51:47
  Ryan: Exactly. But don't bank on it.
• 51:49
  Davina: Yeah. Well, and especially that's especially the case if you stay solo. I'm sorry, but if you stay solo, it's there's there is there's it is your baby. It's not a business entity. Right?
• 52:00
  So there's that factor that factors into it unless you build some very powerful brand intellectual property. Intellectual property lawyers will tell you that, oh, well, if you build a powerful brand, but even that, what may be a powerful brand to you, others may not be interested in when it comes time to sell it. All you have to do is go on to business broker websites and see the businesses that sit there with no buyers of all kinds, law firms and other businesses. Explore them yourself and you'll go, Oh, I'm not buying this because I've certainly done that where I go in and analyze something. Then when you dig in, you're like, Yeah, no, I can't buy this.
• 52:40
  And so I agree with you on that. Alright. So I so appreciate you being here and sharing your wisdom with us and those little, you know, financial insights that we all need to know. How can we get in touch with you, find out more about you, follow you, tell us what we can do?
• 52:59
  Ryan: Sure, absolutely. Easiest ways for that, probably netprofitCFO.com. That is my website. Right in the upper right hand corner is a link to my calendar. We'd be happy to that's like for a short twenty-thirty minute meeting would be happy to have conversations with your audience and fill their needs.
• 53:16
  You can also Google me Ryan Kimmler LinkedIn always does a great job of you know coming up to the top in their in their Google searches. That's a great place to connect with me as well. So, those are probably the top two ways to really connect with me, message me, get a hold of me, and yeah. Great. Thank
• 53:36
  Davina: you for being here, Ryan. I really enjoyed our conversation.
• 53:39
  Ryan: For sure. Absolutely. Thank you for having me. I love to give back and give knowledge. So thank you.
• 53:45
  Wonderful. Thank you.
• 53:46
  Intro: If you're ready to create more of what you truly desire in your business and your life, then you'll want to us at WealthyWomanLawyer.com to learn more about how we help our clients create wealth generating law firms with ease.