Young accounting professionals at Anders all start as generalists and then gravitate towards a specialty. Early in my career, one of my more significant clients was an entrepreneurial law firm that decided they wanted to work on their business rather than just in it. I worked with them as they grew from one metropolitan area to almost every state in the United States by focusing on data and KPIs. It was eye-opening to see the power of dashboards and data on growing revenue, cash flow and net income.
Like most professionals, lawyers think if they do good work that’s right in front of them, then good things will happen. Sometimes good things do happen, but they can be enhanced with a focus on value drivers.
From a financial perspective, law firms are similar to other service-based companies. But there are a number of things to keep in mind, if you’re looking to expand into the law niche.
Here’s what I’ve learned about working as a VCFO for law firms.
What kinds of firms benefit from VCFO services?
Short answer: small to mid-sized firms, and firms in a major growth stage.
Smaller firms with under five partners will have a bookkeeper who knows QuickBooks. Maybe they’re not getting the best, most complete information, but by the end of the year they’ll get there. At around five attorneys, firms often hire a controller, which means more accounting know-how but not strategic advising. Once a firm hits 30 attorneys, they often have a full finance department; those firms could benefit from advisory services, especially if their finance department isn’t trained to focus on the right things.
The $3-$15 million range of revenue is really the sweet spot: they’re not big enough to afford a full-time CFO as well as an accounting team (controller, accounts receivable, etc.), but they’re too big to just have a bookkeeper who only knows QBO. That’s where a CFO who knows their industry can be a huge value-add.
Help clients translate goals into KPIs
With law firms, you're talking about utilization, realization, average bill rate, effective rate and leverage – the key metrics that you would typically talk about in an accounting firm – but the metrics by themselves don't mean anything. It’s how you use them.
That means you learn the business vernacular not to crunch numbers but to communicate with the client. It starts with questions like, “Hey, what really drives your business?” You’ll see most business owners don’t talk to you about the financials; they talk about long-term goals, ongoing pain points – and your job is to connect them to forecasts and metrics.
Even if they do talk about financials, without the KPIs you might find them saying something like, “I want to grow by 25% next year, because I want to be x-size.” But when you start drilling down, they don't know what goes into that. With KPIs, you can ask, “Okay, what would 25% growth take? Is it new client matters, new attorneys or is it utilization?”
From there, you can figure out: Do they need their people to work more hours? Do they need more people? Do they need more clients? With those answers, they can visualize their business. It gives them an idea of what they have to do on the sales and demand side, and what they have to do on the providing side.
Then, when you’re doing financial statements, the numbers will make sense, because you can point to the specific actions they took to get there: “Our numbers look great this month because we improved our utilization and added people.”
It's pretty typical of all professionals – accountants, attorneys, engineers, anybody that charges by the hour for their services: until they understand what levers they need to pull to drive cash flow, net income and revenue growth, they're just saying, “Okay, I want to grow 10%.” But they're not mapping out, “How do I get there and what do I have to do to achieve that goal?”
That's how you teach them the value of working on their business: Learn their vernacular and show them the value of yours.
Set a regular meeting cadence for growth, cash flow and accountability
If your client has been working with a traditional CPA firm, they probably aren’t expecting to see you very often. So it’s important to help them see the value of regular meetings – bimonthly or, ideally, weekly.
With weekly meetings, you can be strategic. Rather than hearing news after the fact, you can participate in the decision-making process. A typical monthly cadence will start with a look at their sales pipeline (three months and longer term). The next week focus on the forecast, comparing projected and actual revenue, and take steps to adjust. (This is especially important for contingency firms who have to cover up-front costs, only win a fraction of their cases, and collect their fees months after they take up a matter.)
Week three looks at the financial statement from the previous month: talk about KPIs and how they did. The fourth meeting can be project-related. (When we do bi-monthly meetings, we do a forecast and a financial statement meeting.) For more detailed information on meeting cadence and how to run meetings as a VCFO, check out the Virtual CFO Playbook Course.
For law firms, this cadence is helpful for a few reasons.
First, it keeps the process moving. You need to make sure your client keeps track of what matters are out there and what’s the value – timewise – of those matters. Do they have enough work to keep all their attorneys busy? Do they need to drum up more work? Do they need to hire somebody new? Those questions should be monitored regularly.
Second, cash. If your clients don’t reconcile cash and credit cards on a weekly basis, there’s no way to know if that half-million dollars sitting in their account is theirs for distribution or is about to flow out of the account to cover operating expenses. When you do a weekly cash flow meeting, you can look at what happened last week, but also what big receivables are expected – and what might happen if they don’t come in. Is it time to draw on a line of credit? Is it possible to tighten up billing practices?
Once you look at 13 full weeks with them, they can get comfortable doing the distribution because they know what cash looks like – or where things are looking scary – and what needs to get done during that time. You don’t want your clients wondering what’s going on with cash (or making a distribution they’ll regret).
That leads to the third benefit: accountability. When attorneys stay on top of their cash, they understand the benefits of making sure all their partners are bringing in the cash that’s in WIP. (Trust me, you don’t want moldy WIP.) Clients don’t magically send checks; you have to bill and collect on a regular basis and train your clients to pay on your terms. You can't just let the client dictate when they're going to pay.
Zero-in on leverage
Of all the KPIs you should expect to focus on, for law firms, leverage is one of the biggest. If you look at the structure of an accounting firm, leverage might be one partner to ten non-partners. Law firms tend to have much lower ratios: One attorney I know admitted their firm’s ratio was .9, which means they had more partners than staff.
On the one hand, this means lawyers are keeping tight watch on their cases, making sure everything is perfect. That’s not a bad thing, by any means. Doing good work is how they got to where they are today. On the other hand, it means they aren’t training their staff, growing their firm, or doing higher level client work. They probably feel a little bit like they're on a hamster wheel.
If you can convince your client of the value of leverage, you’re going to see way more dramatic results for them. It can take a leap of faith to train a less-experienced colleague and to believe that the short-term “loss” of time will repay itself dramatically when they’re able to avoid doing lower-level tasks on a regular basis. It might mean that their utilization rate will go down, but when they look at the big picture, they’ll see overall productivity going up – both in terms of quality of work done and quantity of hours billed.
Take your own advice
One reason attorneys are such good VCFO clients: their business is structured a lot like ours. That means that the problems you’ve already solved around metrics, pipelines, utilization rate, etc., are the same ones you are likely going to help them with.
It also means you need to take your own advice, especially when it comes to delegation. Accountants like being in the spreadsheets, making sure everything’s accurate, when in reality, that’s a given. You need to hand off the basics to more junior members of your team so you can interpret the results and tell the story of why things are how they are – and how to change that. You don’t want to be thinking about why a formula in a spreadsheet isn’t working; you want to be asking yourself, “What are the real drivers of this business? What’s the best advice I can give them?”
Always remember: Clients are paying you to think about strategy, so make sure you are well-leveraged enough to have the bandwidth to do high level work.