The monthly statements you get from your accountant are pretty useless.

That’s why you don’t look at the reports carefully. They’re boring, uninformative, and created for the benefit of the accountant–not you.

They’re often filed away with minimal, if any, review. I know lawyers who never even open their monthly financial reports. They receive the email with attached PDFs and hit the delete key faster than they can down another cup of coffee. Most of us find the standard reports off-putting, unhelpful, and difficult to comprehend. They leave us in the dark, not knowing if the information means we’re doing well or doing poorly. I can’t blame you for hitting delete.

Why are you paying for these horribly useless reports? Do you even know how you’re doing financially after reviewing your monthly financial reports? Probably not. Why? Because the reports indicate where you stand at the moment. They’re a snapshot taken at the end of the month. They don’t tell you if this month’s numbers are better or worse than last month’s numbers. They fail to show you the trend. Are you moving up, or down, or sideways?

Most significantly, your reports don’t show you how to run your law firm, grow your law firm, or increase your net worth. If the reports you’re getting don’t tell you what you ought to be doing, then they’re the wrong reports.

Something magical happens in December

As we get closer to the end of the year, something magical happens. Suddenly you’re getting financial reports that start to make sense. Why is that happening? Because you’re starting to see Year-to-Date numbers that include almost the entire year. You’re seeing nearly twelve months of data. At the same time, you can probably remember your numbers from last year, because everyone knows how they did last year.

Now, as the year comes to an end, you can compare this year to last year. Now you know if you were able to improve on last year. Suddenly the numbers make sense. At least, they make sense for the moment. Suddenly you know whether things are going in the right direction or the wrong direction. You get a glimmer of what actually understanding your numbers might feel like and how that might help you make decisions. The December reports are awesome.

Financial statements prove helpful to you when the December statement arrives in early January. Of course, that sense of being in financial control is fleeting. Accountants think in years. They drop last year’s numbers from the reports when this year starts. When we started to see the trends, we gained insight, but that disappears when the January report arrives in early February. When the January reports arrive, we start over, and then we go back to estimating and extrapolating, because we only have one month’s worth of numbers. The bottom line is that most of us don’t know our numbers. We have only a vague idea of where we stand.

Wouldn’t it be nice to know your numbers more than once a year?

Imagine running a business based on a solid understanding of the finances. This does not have to be your secret fantasy life. It can actually happen.

Let me illustrate: let’s say that your revenues for 2019 were $1,200,000. As the months have passed this year you’ve likely been thinking about how your year might end up. You’ve wondered if it would be up or down compared to last year. As each month passed you tried to extrapolate to an annual figure to determine if you were on track. You’ve looked at the total year-to-date, and then estimated what would happen before the year ended. If, at the halfway point, you were at $600,000, then you assumed you were on track to equal last year.

Unfortunately, that method of projecting doesn’t usually work. It fails to account for seasonality and other factors that might impact your annual total–you’re guesstimating based on gut instinct. You’re counting on your fingers. You’re doing math, and you’re not very good at math. This is insanity. Why do you have to do math in your head when you’re paying a bookkeeper? Isn’t not doing math the real reason we chose to go to law school instead of becoming software engineers or scientists?

The reports we get from our money people should be simple enough for a lawyer like me or you to understand without having to use ANY OF OUR FINGERS.

Not knowing your numbers is risky

When I ask for essential information from lawyers who are running law firms, the answer is far too often, “I don’t know,” usually followed up with, “I can check.” Or worse: “I’ll get the report in a few weeks and I can let you know then.”

Many times, when I ask the questions, I get a blank stare instead of an answer. If you don’t know your numbers, you can’t make the decisions required to run the business. Running a business on last month’s info is like driving the car with last month’s speedometer reading. Not good.

Even worse is trying to run the business with last month’s data and no longer-term context. Are we speeding up or slowing down? Are we headed in the right direction or are we going the wrong way? We don’t read our financial reports because they’re not helpful. That gets especially dangerous in turbulent times.

It’s all good until the economy tanks

Financial information matters even in a normal year. But, boy oh boy, does it matter in an abnormal year. 2020 started off great for many law firms. We were living high on the hog and didn’t really worry about the finances because there was more than enough money in the bank.

But then, things changed. Lockdowns, slowdowns, meltdowns–all the downs. Some of us got busy, while many of us got slooooooooowwwwwww. It’s in the crazy times that we really need to know our numbers. I’ve got a friend who was doing well. At $1,300,000 per year as a solo practitioner, her life was good. She’d just moved into a beautiful new space, bought all kinds of marketing services, and was feeling successful. But she had no idea where the money was coming from, where it was going, or much of anything about what was happening financially. She was enjoying her ignorance because she was making money.

Things are different now. The economy is bumpy. She’s watching neighboring businesses go bust. Her phone is continuing to ring–she’s lucky so far–but she has no idea if it’s ringing more, or less, than it rang this time last year. Her uncertainty, even with money continuing to come in, has caused her many sleepless nights.

You can know your numbers every single month

Knowledge is power. Ignorance is failure. Ignorance gets painful–fast. What she needed, and still needs right now, is a simple dashboard for her finances. Instead of boring, complicated, opaque reports, she needs something simple like she uses to keep her car going in the right direction, at the right speed, with the right amount of fuel. She needs the check engine light to turn on when the engine needs checking. She doesn’t want or need to dig through a report prepared by a CPA and intended to induce narcolepsy.

When we lack decent data–when we drive without a speedometer, a fuel gauge, or other indicators–we don’t realize when things go wrong. We’re still busy, rushing around getting things done, and we have no way to know that the revenues have slowed, while the expenses have increased and the profits are headed into negative territory. Suddenly, profits turn to losses. The clients stop paying. The credit line kicks in. Debt piles up, bills go unpaid, and our lack of information hits us with punishing speed. Without a dashboard, you have no way of knowing that things are changing, or whether they’re changing in a good or bad direction. By the time you realize that corrective action is necessary, you’re 6 months too late.

Simple, clear, easy financial reports are within your grasp

Wouldn’t it be amazing if your numbers made sense every single month?

What if you could use the information coming to you each month to actually understand your business so you can make smart decisions? What if you knew the trends? What if you knew what was working and what wasn’t? What if you could always see a year, or more, at a glance?

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Running your business based on the numbers, without having to do math in your head, guesstimate, extrapolate, or count on your fingers is possible. All it takes is prompting your bookkeeper with a little guidance and a lot of cajoling. You can get useful information from the same people who send you the useless crap you’re getting now.

You can know your numbers, make decisions based on your numbers, and do it all at a glance–you can devote less time than you currently spend sighing and being frustrated by the useless monthly reports.

Which numbers to track?

There are numbers and there are NUMBERS. Some matter more than others. Some matter to you but not to your accountant. Some are required for tax purposes but some are required so you can determine your destiny.

Not all numbers are created equally. And, different numbers have different levels of importance in different practices. Your bookkeeper may be used to tracking money only. That’s fine, but you may need a new bookkeeper, if the old bookkeeper is reluctant to extract the details you’re looking for.

Some numbers have to come from places other than the checking account. What do you want to see? Let’s keep it simple for now and I’ll elaborate below. But you need the basics: revenues, expenses, profits. And you likely want to see the expenses broken down into three categories: payroll, marketing and other (everything else). Reports featuring fifteen or more categories of expenses are unreadable.

You probably want some other Key Performance Indicators (KPIs) as well. Every practice is different, but consider tracking things like online client reviews, consults scheduled, referral source meetings conducted, inbound phone calls, etc.

What gets measured gets done. So you need your reports to actually allow you to measure what’s happening, and that extends to activity and behavior. Your reports need to go beyond money alone.

A picture is worth a thousand … dollars!

To get started, you need to keep up with your revenues on a rolling twelve-month basis. Create a report that shows you what has happened for the past 12 months. Instead of your reports showing the current month and year to date, which is often the default, get a report that shows the current month plus the total of the past twelve months.

At the end of January, for instance, you’ll look at a total running from February 1, 2020 through January 31, 2021. That will show your annual revenues rolling along as you go through the year. If you’re shooting to do better than $1,200,000 for the year, you’ll know whether you’re trending in the right direction. You can use this rolling twelve-month total (some call it a Trailing Twelve-Month average or TTM) for numbers other than revenues.

You can create a TTM number for anything important to your progress. But the real magic happens when you turn those numbers into a graph–a graph of trailing twelve-month totals. A picture really is worth a lot more than the numbers it represents. A graph shows you trends in an instant. Instead of requiring you to read and understand the numbers in each column of a report, a graph allows you to see all the numbers presented in a simple, visual format.

It’s the best way for your brain to process the information you need. You can use TTM graphs for nearly anything. Use graphs for expenses, profits, consultations, new clients, closed files, etc. Trailing twelve-month graphs give you a quick feel for your business, so that you can figure out how you’re doing every month of the year.

TTM numbers are a little tricky initially

It’s important for these graphs to be built around averages rather than the data from every discrete month. The average will level the graph out. When financial indicators are graphed single month by single month (not presented as twelve-month averages), you may be tempted to overreact to a bad month–or even a good one.

That’s a mistake.

Single months, of course, aren’t strongly indicative of anything in particular. It’s common for lawyers to have a great month followed by a terrible month. That often results in ecstasy followed by agony. But when those two months are averaged together, it’s clear that the two-month period was pretty normal. The emotional reaction was unnecessary. But–and this is a cautionary note about TTM graphs–using last month’s data to calm yourself means you are, to an extent, relying on old numbers. That’s even more true when you average an entire year and are actually relying, in part, on twenty-four-month-old data (your number from twelve months ago represents an average with the previous twelve months).

There are some pitfalls to relying exclusively on this dated data. It’s old. The graphs will only react to sudden changes slowly. If you rely on the data from last year that is contained in your twelve-month averages, you’re counting on last year’s data being helpful to this year’s decision making.

That’s probably a good thing overall, but in an unexpected situation, you ought to be conscious of the dated nature of your data. If you rely exclusively on your latest numbers, your information will be more current, but you will be missing out on the valuable comparative analysis.

You might also be lulled into a false sense of security—or stirred to unnecessary panic—if your business is seasonal or if something out of the ordinary happens in your firm. The trailing-twelve-month calculations are almost always more helpful than what you’re getting now.

By looking at your data for the most recent 12 months, you will not only be reviewing current numbers, but you will be smoothing out the seasonality and other factors that might not be immediately obvious if you review only previous year or current year-to-date data. This can help you see the ebbs and flows in your business, which in turn will help you make more informed business decisions.

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Once you get going you can do so much more

Your data collection and graphing will become an ongoing exercise in understanding your law firm. You’ll learn over time which numbers to track and which numbers don’t matter.

It’s smart to start looking at a few graphs and then add more as you come to understand them. Let curiosity be your guide. Use the numbers to solve your problems. The more actively you engage with your numbers, the more you’ll learn.

When you determine that a particular metric isn’t helpful to track, be sure to remove it from your dashboard. You don’t need to clutter your view or your mind. Eventually, you’ll track many different measurements of your progress and you’ll likely find some unexpected correlations among your data. Below are some of the metrics you might track as your system evolves. Move slowly and carefully. Don’t track everything from day one.

Allow yourself to grow into your particular system and give yourself time to adapt to a more numbers-driven approach. Here are some indicators you might choose to measure, depending on your particular business model, situation, and level of development:

• Revenues, expenses, profits
• Marketing, payroll, and other expenses
• Profit
• Receivables
• Payables
• Website visitors
• Hours billed
• Online reviews posted
• Client satisfaction surveys
• Cash on hand
• Debt
• Incoming inquiries
• Initial consultations
• New clients
• Referral source meetings
• Marketing touches
• Revenue per employee
• Average fee per client
• Client lifetime value
• Cost of acquiring each client
• Your net worth

As you fine tune your numbers you’ll start to see developments and trends emerge. Ask yourself: What are the trends? Are these numbers up? Down? Flat? You’ll also see the potential for taking single measurements and combining them with others.

Ratios can also be calculated on a TTM basis as well. For instance, you can calculate the ratio of consultations to retainers using twenty-four months of data turned into a trailing twelve month graph. You’ll see the value when you see the graphs.

Build your own dashboard

As you settle on the key graphs you need to monitor, it’s time to turn those graphs into a simple dashboard you can instantly consult. It needs to be customized for you. It needs to suit your particular needs and your approach to processing information.

Many lawyers go out and buy a nifty business dashboard software product when they decide to tackle the problem of getting real-time information. I’ll admit that there are many impressive products on the market. I’m guessing you’ll end up using one at some point. But don’t do it yet. Don’t buy the cool new toy.

Start slowly and grow into more sophisticated products. You’re learning to drive, and you need a banged-up old Toyota while you’re operating with a learner’s permit. Buy the Tesla with autopilot after you get a little experience.

Right now, you need a feel for the road, you need the noise coming through the floorboard, you need to experience the movement in your fingers and buttocks, you need to control the car yourself before you hand it off to the computer. Use Google Sheets or Excel.

Do it the old fashioned way. Build it one step at a time before you get fancy. Work with your bookkeeper and turn your numbers into graphs that will suit your brain’s way of processing information. Turn columns of numbers into trailing twelve month graphs.

Think through ways to combine different parts of your business into a single number or ratio. Look for indicators that predict the future, rather than simply reporting on the past. You need to be able to connect the dots between the information you receive and the action you need to take in order to correct course. That comes from knowing the data and where it’s coming from, and from creating graphs that you can understand and quickly comprehend.

The fancy products give you more than you need and deliver it before you’re ready for it.

Know your speed

As your dashboard comes together, you’ll start to see the patterns. You’ll realize that stepping on the gas causes the business to speed up. You’ll notice that some activities result in things slowing down. You’ll gain control over the business as you observe the relationship between the inputs and the outputs. Before long, you’ll be able to glance at the dashboard, know the speed of the business, and make adjustments.

You’ll start managing the business by the numbers, rather than being forced to guess because you don’t have the appropriate information for making decisions. Instead of buying marketing when you feel slow or refusing cases when you feel busy — you’ll make data-based decisions rooted in reality.

Most lawyers make business decisions based on how they feel. They’re driven by emotions, rather than data. Not you. Your business will hum along at the speed you decide is appropriate. You’ll know where you’re going, which route to follow, and how long it’s going to be until you arrive.

Leading indicators are even more powerful

Over time you’ll likely come to rely on a single metric as your Key Performance Indicator. Some argue that there are multiple KPIs for every business. That’s a good argument, and it’s why I suggest your dashboard contain quite a few graphs. But–feel free to call me overly literal–the “key” in “key performance indicator” means that one indicator stands out more than the others. It’s key. Maybe there’s room for two KPIs, but in my simple mind, key implies a pretty short list.

Not everyone sees it that way.

If you Google “law firm key performance indicators,” you’ll find plenty of different business indicators to measure. Pick and choose the important ones that will give you a reliable indication of your business’s performance. But I define KPIs as “the few indicators that drive the business.” In my mind, there should be one, maybe two, at most three KPIs.

I’m a simple guy. One KPI is good enough for me.

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You’ll eventually discover your KEY Key Performance indicator. It’ll become your North Star. It’s the guiding light that helps you focus your energy, make decisions, and align your team. It’s the one number that matters more than the rest. You need to know your KPI like you know your phone number. Then you need to learn how to push that number in the right direction.

This will make you dramatically more successful. If you don’t know your KPI (and how to push it), you won’t be successful. It’s as simple as that. So join me on this little adventure as we hunt for your key performance indicator.

What’s your primary KPI?

Many numbers are important to a business. You can track every element of your business–and of course all these numbers matter–but they matter far less than your KPI. When your KPI is in good order, your other indicators tend to fall in line. When your KPI underperforms, the rest of your fancy graphs turn in the wrong direction.

The right KPI is a strong leading indicator

Your KPI should be the one number out of all that data that makes the most difference. Look for something early in the client journey process–something before revenue, before the consultation, before the call, and before the website visit.

It should be something that drives business to you and, therefore, drives the bottom line. Many businesses use lagging indicators, but you should use leading indicators. Profit is an example of a lagging indicator. Profit tells you how things went, not how things will go. Profit is a lagging indicator that tells you the outcome after the game is nearly over.

When you search for your KPI, look for a leader. You want an indicator that tells you how business will do in the future. If you can find this number, you can use it to anticipate the future and improve the likelihood of success.

How to discover your KPI

Your KPI is the number that causes your business to succeed. It must be measurable. It must be something you can change.

It should be something that impacts your lesser indicators (like the ones I mentioned above). It’s often, but not always, something that measures new business. Oftentimes, it relates to marketing or reputation, but in some practices, it might relate to long-term retention of clients. Finding your KPI is an evolutionary process that takes time, experimentation, thought, and careful attention to data. As you evaluate a potential KPI, you’ll find yourself moving backward in time. You’ll look for activities and results that impact the potential KPI and discover that there’s a deeper number that’s actually a stronger indicator.

Your KPI will evolve over time, but not because the business changes. You’ll just get smarter and see the business more clearly. You’ll figure out which numbers–and which behaviors–really drive the business.

For example, it’s common for a new business to start with revenue as their KPI. Then they learn they can impact revenue with something more focused, like ‘marketing expense.’ They realize, for instance, that the more they spend on advertising, the more they profit. So the advertising expense becomes their KPI. Then they take it a step further: they create a formula to calculate advertising reach and frequency.

The result of this formula becomes their unique KPI. Each step along the way is the consequence of experimentation and careful attention to the numbers.

Build the business around the KPI

Once you know your KPI, you know the secret to growing the business. You’ll have a guiding indicator that keeps you on track.

You know that driving that indicator will cause the rest of the business to move in the right direction. Of course, you’ll face new challenges, like managing the people and technology that are required to make that number move. But knowing the KPI allows you to scale up.

Once you know which KPI is most important, you can build your business around that number. The KPI becomes the focus. It becomes the topic at meetings and planning sessions, and it clarifies your vision. You’ll know you need to make decisions based on the KPI, rather than emotion.

I’ve developed my own personal list of questions for uncovering the right KPI. Finding my KPI has never come easily for me. It always required a fair bit of hunting, experimenting, and thinking. Let me illustrate.

Example 1: My law firm key indicator

When I started practicing law, my personal KPI was the amount of cash in my checking account.

As an associate, I learned that certain behaviors caused my personal bank balance to increase. I could work on certain projects, align myself with certain partners, engage in particular marketing activities, and kiss certain asses to generate more income for myself. Each of these activities was measurable.

When I left the firm to go out on my own, my KPI went through a similar evolutionary process. At first, I saw only profit. Then I learned how profit connects to revenue. Then I discovered the not-insignificant impact of expenses.

Eventually, I connected the dots. I realized that marketing activities were measurable and that they were key indicators for my firm. More marketing usually created more revenue. I measured our marketing expenditures, believing it was our KPI. But then I realized that more marketing didn’t always create more profit. I needed a more targeted KPI. I experimented and measured everything I could.

I happened to have a neighbor who was a college professor; he did surveys as a side business. He agreed to survey our clients. Those surveys evolved into a Net Promoter Score. Over time, I realized that the Net Promoter Score was a leading indicator for our business.

Previously, I had assumed that marketing expenditures drove success. But marketing a business that provided poor service wasn’t helpful. I had to maintain service quality, measurable by the Net Promoter Score surveys, in order for the marketing expenditures to work. I learned that driving up the Net Promoter Score drove up referrals, calls, consults, and client count. Through an evolutionary process, I learned to focus on client satisfaction instead of marketing.

My real KPI was quite different from my original assumption. That revelation allowed us to grow faster with a lower investment in marketing and a higher margin overall.

Example 2: Another law firm KPI

Let’s take a look at another law firm with which I’m familiar. This firm also went through an evolutionary process to discover their KPI.

Their KPI is more fun than mine. Their KPI is the ‘number of parties.’ This law firm had social events for prospective and existing referral sources. More parties led to more lunch and coffee dates for the business development associates, which resulted in more revenue, which allowed more profit.

For this firm, more parties result in more profit, so they built the firm around driving up their unique KPI. When the firm makes plans for the coming year, they plan parties. When they have firm meetings, they talk about parties. When they schedule vacations, they arrange them around parties. When a vendor comes in hawking ad space, leads, or other marketing opportunities, the firm is only interested if those activities create more parties.

Will their KPI change down the road? Probably, because they’ll keep learning and growing as they experiment.

Knowing your KPI makes it easier to make decisions. It gives you focus. It helps you see your progress and know that you’re building a secure future.

Example 3: My new KPI

As we expand the Rosen Institute, we recognize the importance of understanding the KPI for this new business. We experiment and focus the business on things the numbers reveal as important.

At this point, it appears that the key driver for the business is email signups for our Friday File emails. As the email list grows, so does our profit. Of course, we experiment and test to see if that indicator is as predictive as we believe.

We’ll continue to look further out in the pipeline to see if there’s a better leading indicator to use as our KPI. Slowly (but surely) we’re building this business around increasing email signups. You may have noticed our more aggressive approach to collecting signups.

We’re also doing more to promote email signups in a variety of other media. We measure each effort against our KPI to gauge effectiveness. We’re focused on our KPI. As it improves, revenue and profit improve as well.

Find your KPI and build around it

I suspect you’re starting to see how different activities can drive your bottom line, and the importance of focusing on the numbers instead of your emotions.

Your KPI is your North Star. It illuminates your decisions, aligns your team around a mission, and keeps everyone focused on the factors that will build the business.

Your KPI isn’t always obvious, but it’s central to your success. Experiment and measure until you discover your KPI.

Your KPI should be the first thing you think about when you wake up in the morning. It should dictate what you do every day. You should use it to drive your business in the right direction.

Your boring financial statements are an inspiration

Those boring financial statements we referenced at the outset of our discussion today aren’t helping you. They aren’t going to be the guide to growing your business.

But now, you can see the way forward. You need the right numbers, turned into trailing-twelve-month graphs, gathered into a readable dashboard, and headlined with your Key Performance Indicator, which will guide you toward success.

Pulling all of this together isn’t an instant or easy process. It involves getting comfortable with your data. It involves guiding your bookkeeping process toward creating useful views of information. Then it involves making decisions based on what you’ve learned, rather than gut reactions to events. What I’m suggesting isn’t a quick fix; it doesn’t happen overnight; it shouldn’t be rushed.

If you persist at turning your old, boring, mostly useless financial statement into an illuminating tool, you will actually make more money. More money? That would be nice, wouldn’t it?

A simple dashboard built around the right key performance indicators makes driving your law firm as simple, effective, and satisfying as driving a high-performance vehicle.

It’s within your grasp if you get access to the data, push a bit to turn that information into useful graphs, and give yourself the time to understand your numbers. You’ll soon be able to make your law firm go exactly where you want it to go, at the speed you like, with the comfort you deserve.