Saturday, July 30, 2011
[M]ost young lawyers have no idea how long it takes to build up clientele or how much it costs to run a law firm. You might be overworked, but before you decide you are underpaid, get real with yourself by doing some investigation and calculation. You may not be aware of all that is included in the overhead attributable to you.
To help you in running some rough calculations, here is a non-exhaustive list of overhead items to consider:
First, consider the costs allocated directly to you such as your salary, payroll taxes and benefits, and the pro rata portion of such costs attributable to administrative assistants and paralegals assigned to you, plus your continuing legal education, bar dues, membership fees, parking, etc.
Second, consider your percentage of the firmwide personnel costs: reception, accounting, IT, office manager, file clerks and any other staff salaries, plus related benefits and costs such as payroll taxes, health insurance, vacation and holidays, sick leave, parking, overtime and bonuses.
Finally, consider your percentage of the general overhead for the following items: rent, furniture, equipment, software and other technology, property tax, utilities, client development expenses, repairs and maintenance, property and general liability insurance, malpractice insurance, Lexis, Westlaw and other subscriptions, firm membership fees, office supplies, websites and advertising.
A RULE OF THUMB
As you can see, there are substantial costs beyond your salary to be considered in determining how profitable you are. For most solo practitioners, the overhead expenses range from 45 percent to 55 percent of their gross revenues. If you don't want to do the hard work of identifying all of those costs described above, use that as a rule of thumb.
So unless you are bringing in significantly more than twice your salary and bonus, you may not be profitable at all. For an excellent article about calculating your profit and loss equation to the firm, check out "The Profit and Loss Equation for Associates" by my friend Ronda Muir, and her colleague Tanja Diklic.
LEAN AND MEAN
You may dream of being your own boss, running a lean and mean shop with a lot less overhead than your current organization. With the technological advances of the last few years, that is undoubtedly an option. Just don't underestimate the three crucial responsibilities in the success of any law practice: client development, collection of fees and taking out the trash.
Well, you may not really have to take out the trash, but you will have a lot of administrative duties that hinder your ability to rack up billable hours. Almost all businesses wind up writing off some accounts receivable, and for most lawyers, it takes a lot longer to bring in new clients than they expected.
I don't want this article to dash your hopes and your belief in yourself. I want it to encourage you to do some realistic assessment and planning so that you don't end up dashed on the rocks.
Read the rest here.