Whether you make money practicing law depends on the answers to a few simple questions.
First, can you bring in revenues? That requires you to attract clients and close the deal at reasonable rates. If you can make that happen, you’re headed in the right direction.
Second, can you attract those clients at a reasonable cost? If you’re spending $500,000 a year on advertising to generate $1,000,000 a year in revenues, then you’re on the wrong track. Spending 50% of revenues on marketing isn’t likely to leave any money for you. However, if you can generate those revenues for somewhere between 2% and 18% of revenues, then you’re likely leaving a profit for yourself to take home. Of course, I’d rather see you at 2% and spending most of it on lunches.
Finally, can you manage the payroll? If payroll exceeds 50% of your revenues, then you’re likely to have a pretty thin bottom line. You can let payroll creep up toward that limit, but you’re not leaving much for yourself. You’d have to be doing a healthy volume to make those numbers work.
Let’s spend some time on payroll.
The Payroll Dilemma
To grow, you’ve got to hire good people. You’ve got to give them the authority and autonomy to do their jobs and help you achieve your goals. You’re going to end up depending on these folks, and you’re going to worry about whether they’ll stay.
Keeping people can get especially difficult as you grow. Growth is painful, and people experience stress. They sometimes imagine that the grass is greener elsewhere as your firm evolves and changes. One way to keep them is to give them more money.
Also, as you grow, your employees start making assumptions about how much money you’re earning. They see the cases flowing in, and they assume the money is flowing out—to you. They want their share. It’s tempting to give it to them now that you’re doing better than you were.
You’re likely making more than you ever have before. You’re feeling like Ms. or Mr. Big. You assume you’ve got the golden touch and things will keep going the way they’re going. You’re optimistic, you’re worried about losing your people, and you’re feeling affluent. It’s a dangerous cocktail.
The First Rule of Payroll Management
There is a basic rule of payroll that I’ve learned in the school of hard knocks. You can pay your employees in one of two ways: you can pay them (1) more or (2) nothing.
Here’s what I mean. Your associate is earning $65,000. Things are going well, and she’s doing a good job. She’s going to want more. You’re going to want to keep her. You’re likely to pay her more.
Then, if you do what most of us do, you’re going to pay other employees more as well. They’re coming to you one at a time, and payroll starts to creep up. The next thing you know, it’s hovering well above 50 percent of revenues. Now it’s too high, and you’re not getting paid what you were getting paid before. Ugh. This isn’t what was supposed to happen. Only moments ago, you were feeling optimistic and affluent.
What to do? Now that payroll is out of hand, you’ve got to reduce payroll. You’ve got to bring down that percentage. How will you do it? It won’t happen by going back to that associate and offering to cut her salary. She’s not going to accept that option. In fact, as usual, she’s going to want more. Now you’re faced with picking between option (1) more and option (2) nothing. She’s important to your practice. You don’t want to let her go. Unfortunately, you’ll soon find yourself having the same thought process and analysis with all of your employees. No one’s going to want a pay cut, and you’re not going to want to let anyone go. It’s a mess.
The Solution
Start monitoring payroll now. Keep the percentages in check. Don’t create a situation where you’re going to be forced to make a difficult call. Pay attention before you create the payroll problem. The ratios you establish now are likely to stay pretty constant as you travel through the increasing revenues from $1 million to $4 million. Once you reach that level, you’ll find the formulas change a bit, but not dramatically.
You’ve got to stay on top of the payroll early in the game. It’s really ugly if you have to fix it after you’ve grown, and fixing it can set you back by several years. Don’t rationalize letting the payroll drift up. Don’t talk yourself into thinking you can fix it later. Don’t believe your overly optimistic spreadsheet and projections. You’ve got an opportunity to get it right on the way up. Don’t let it become an issue that puts you on track to head down.
