How to Choose the Right Business Model for Your Firm
If you missed our conversation with Moshe Amsel last week, he is the host of the Profit With Law Podcast, a certified Profit First Professional, and the founder of the Law Firm Growth Summit. On top of his financial expertise, he is a paramedic and a dad of six.
When we last talked with him, we dove into Profit First and “Finance 101 for Law Firms.” Moshe went into so much detail and really set the foundation for understanding revenue and profit.
Today, we want to move right on and talk about benchmarks and business models.
When we talk about benchmarks, it’s important to first understand that these benchmarks don’t work best when you’re first investing in your firm. Rather, they work best during the rest periods in your firm.
Too many people make the mistake of “waiting” until they’re ready to invest. However, you may need to invest in your firm earlier even if the benchmarks you’re aiming for won’t be hit. Doing so allows you to look at benchmarks differently: they’re a target to get to after the investment has been made.
For example, if you invest in a new staff member and are spending 45% of your revenue on staffing, you can know that you need to be spending 25% of your revenue on staffing, and this will tell you how much you need to increase your revenue as a result.
There are 5 main expense areas: marketing, labor, office space, technology, and other (insurance, subscriptions you pay for, professional services, etc.).
Let’s break these expense areas down a little bit and look at the benchmarks for them. Your operating expenses in total should be 30% of your revenue. For a firm with revenue between $0 and $250,000:
- marketing expenses should be 50% of that 30%
- labor expenses should be 20% of that 30%
- office space expenses should be 10% of that 30%
- technology expenses should be 10% of that 30%
- all other expenses should be 10% of that 30%
For example, a $200,000 firm should be spending 50% of 30% of its revenue on marketing. This means they should be spending $30,000 on marketing alone.
The caveat here is that law firms have different business models. You can’t just copy these percentages blindly and expect them to work perfectly for your business model. What you saw another firm doing was based on the size of their firm and their goals. Your benchmarks might have to be very different.
There are many different ways to model your practice. How you price your services, bill your clients, and the experience you create for those clients will dictate how well you can stick to the percentages laid out above. This is why you need to understand what business model you’re running.
For example, a bankruptcy law firm is a low ticket, high volume practice. The way to be successful is to push as much work as possible to the lowest-level support staff as possible. The actual attorney and paralegal involvement is very low. This kind of practice has to spend a significant amount on marketing because they need a bigger reach to get more clients coming in.
Your benchmark percentages might be very different from that kind of firm. Evaluate your firm and its ideal business model and then turn to the benchmarks laid out above.
If you want to learn more about each expense area in your firm, check out Episode 031: Financial 101: Understanding Revenue vs. Profit – What Are Your Margins? (Part 2).