All types of businesses face financial challenges, though there are many you need to be aware of when starting a law firm. Opening a business in this specific sector means you’re under all sorts of financial pressure – and when you take a step back and view the legal sector as a whole, you spot common financial problems across the board.
What are the biggest issues to contend with, and how can you prevent them from halting your law firm in its tracks?
Inconsistent Cash Flow
The traditional law firm business model operates on invoices, but this regularly leads to cash flow issues. In the legal industry, it can often take months, maybe even years, for certain cases to run their course and be completed. Your clients won’t have to pay their invoice until the case is over, which means you may be working on multiple cases at the same time without receiving payment for months.
It creates a massive cash flow backlog where you still need to spend money, but you may lack the working capital to cover all of the other key costs on this list. And this is without mentioning invoice contentions where clients query your invoice and try to argue that they’re paying too much due to the outcome of the case, etc.
This is also one of the hardest problems to correct, though a good starting point is to seek financial advisory for law practices so an expert can view your cash flow situation. From there, it’s normally a case of working out how to free up extra cash within your business. This may involve taking on more “easier” cases so you can secure money in days/weeks instead of months. You may also consider diversifying income streams by creating informative legal content on your blog or social media and trying to reel in advertising revenue.
There will also be the common cash flow fix of identifying ways to save money, reducing the cash that has to leave your business. And of course, you’ll work on speeding up invoice payments and preventing clients from being able to drag things out. It could be better to adopt a business model that demands half of your fee at a certain point and then half later when the case ends.
Marketing For New Clients
Law firms find themselves in a tricky situation as they need to find ways to acquire new clients. This means marketing is one of the things your business needs help with, and you usually have to focus on the following:
- Targeting leads who are actively searching for legal services
- Reaching out to prospects who may need your service but aren’t aware of it yet
Consequently, you invest heavily in things like SEO and paid online advertising to target the individuals who are actively looking for law firms in your area. With the amount of competition out there, this can be an extremely expensive task to help you stand out.
Alongside this, you also have to invest in social media marketing, content creation, and other elements that target people who may be interested in your service. You want to create things that make someone go “oh, I actually might need a lawyer to help me with this.” Again, it adds to your marketing budget and leads to this being one of the biggest financial concerns you’ll face.
The conundrum with this is that you need to market your business for client acquisition, but you can’t afford to overspend. In this situation, the best approach is to rely on data analytics and A/B testing to work out what has a positive effect on your business, and what doesn’t do anything. This helps you identify marketing expenses that aren’t yielding any returns, so you can scrap them and save money.
High Employee Costs
According to Indeed, the average salary for a lawyer is just over $100,000 a year. That’s…a lot of money – and it only takes into consideration the salary costs, not the additional costs of employee benefits.
When running a law firm, you need a pretty big team of people to help you win as many cases as you can. You need experienced lawyers with big salary demands – but you also still need associates and people to handle more of the admin side of things. It ends up becoming one of the most costly business endeavours in terms of employment costs.
So, how do you deal with this? Well, you can’t, not really, anyway.
The only approach is to focus on building the best law firm possible, which encourages employees to stick around for longer. If you fill your office with talented individuals, you have a higher chance of winning more cases, which means you make more money and can deal with the employee costs. Fostering a good workplace culture also prevents people from wanting to leave and go elsewhere, so make sure your legal team can work their way up the ranks, earn promotions, get salary bonuses, etc. It may seem like you’re adding to the expenses, but this reduces turnover – which ends up being one of the biggest issues.
The “No Win No Fee” Business Model
Some law firms struggle because they run with a “no win no fee” business model, whereby the client only pays if you win their case. It’s a fantastic model to use when promoting your business – but it only works out if you win these cases.
With that in mind, you should be incredibly cautious when taking on clients using this model. Only accept cases that look winnable, or you’ll waste time and money building a case, just for it to lose. This may seem harsh, but it’s the reality of running a profitable law firm. Also, it puts even more emphasis on building a very talented team because you need lawyers who are excellent at their jobs and can easily win cases, so you get your fee.
To sum it all up: running a law firm presents several unique financial considerations that can drain your resources if you don’t address them properly. Spend time sorting out your finances so you give your business the best chance to succeed.
