Key performance indicators, or KPIs, are quantifiable measures of performance over time for a specific objective. KPIs indicate a company’s long-term performance and document a company’s strategic and operational achievements. Knowing which specific financial KPIs need to be monitored to drive your firm’s success is critical because without clearly identifying and reporting them, it is difficult to understand where you are on the path to achieving your goals.
Having accurate accounting and meaningful KPIs for your law firm gives you the confidence to access the information you need to assess progress toward your goals and make strategic decisions based on reliable and relevant data.
Many law firms struggle to know where to begin when it comes to the right KPIs to track for better financial performance. This list below is a great starting point in identifying critical law firm KPIs. It is representative of the most important and common KPIs that our law firm clients track to measure their own performance and monitor success and progress toward growth goals.
- Billable rate per hour: A law firm’s billable rate per hour measures the revenue billed to clients less write-offs or discounts, divided by the number of hours worked. For greater analysis, this can be sliced and compared by client, by lawyer, by experience and compared against standard billable rates within the firm.
- Revenue per lawyer: Calculated by dividing the firm’s gross revenue by the number of lawyers. This measure shows how much each lawyer at your firm brings in for the business.
- Revenue billed vs. revenue collected: This is the ratio between the actual amount of money you collected versus what you billed out.
- Collection rate: The percentage of invoiced amounts that are paid by clients. It is a common measure of the effectiveness of collections.
- Utilization rate: Also called “billability”. This measures the percentage of your lawyer’s time spent on billable work. This should be measured against a uniform number of hours for each full-time employee.
- Realization rate: Often overlooked, misunderstood, and miscalculated, the realization rate is the proportion of billable hours at standard billing rates to the amount that is actually billed to clients. Higher realization rates indicate better profitability and the ability to bill at your stated standard rates.
By tracking and reporting on your firm’s KPIs, you will be able to gain valuable insights into the financial health of your law practice. KPIs provide guidance and focus on critical operating metrics to help identify and take actions that will have a positive impact on your bottom line. By establishing and tracking the key performance indicators above, you will be better able to direct the efforts of your team, understand your current financial performance, and in time, predict the future performance of your law firm.
Contact Consultance Accounting’s experienced and knowledgeable staff to optimize your accounting systems. Identify and track the KPIs that will help you make better decisions that support the growth and financial health of your practice.