Get A Handle on Your Firm’s Revenue Capacity
Like any business, your firm has a maximum realistic capacity for earnings in a given period. Like your car’s tachometer, there is a corresponding redline where you max out your earnings for that period. That’s your revenue capacity: the amount of money your law firm generates by it’s billing practitioners including lawyers, paralegals, librarians – anyone who bills, all working at top capacity. This is your high-level benchmark.
In order to measure your overall success, it’s important to gauge what percentage of your revenue capacity you are actually operating under. Once you establish a baseline here, you can work backwards to identify gaps and improve that rate.
Calculating your revenue capacity can be deceptively simple, depending on the size of the firm, the individual billing rates and any alternative fee arrangements that are in place. Let’s start with a simple example, featuring a solo firm with one person billing. For simplicity sake, let’s determine that this firm is a family law practice that bills on an hourly basis.
The sample revenue capacity would be calculated at 40 hours per week and $200 per hour. In theory, the revenue capacity for the firm is $8000 per week. Operating under sustained, ideal circumstances, this translates to $416,000 in annual revenue capacity.
For a more complicated example, let’s look at a firm with 3 attorneys and 3 paralegals, billing at two different rates. Let’s say the attorneys bill at $250 per hour and are maxed at 50 hours per week. The paralegals bill at $100 per hour and can bill no more than 40 hours per week. The revenue capacity for this firm would be (3 x $250 x 50) + (3 x $100 x 40) or $49,500 per week. Again, this translates into an annual revenue capacity of $2,574,000 per year.
Now comes the fun part: measuring what percentage of revenue capacity you are currently operating under. Sticking to the first example, let’s say our solo attorney spent 4 hours last week on various administrative tasks for his home home office. That firm then went on to bill 36 hours, correspondingly. The firm billed 36 x $200 or $7200 for the week, or 90% of their revenue capacity of $8000. In this example, it’s easy to see why the firm finished the week at 90% of capacity, but for larger firms with several or many employees, the paper trail can become more complex.
Getting a handle on what your employees have billed over a certain period of time can be made much simpler by utilizing the right practice management tools like Rocket Matter, as in this example report. Utilizing specialized reports like these can help you identify who is billing at or near capacity on a regular basis and who is billing substantially below. You can then work backwards to try and identify the reasons and work on incremental improvements.