What are the key metrics?
Three main business problems for a personal injury lawyer are picking up cases, funding the cases and waiting for the settlement. You must measure these numbers so you can manage them and work to improve your finances. Your cash flow is dependent on it. A personal injury law firm has business metrics to watch just like any other business.
- Client acquisition
- Cost of acquiring a client – This includes advertising and marketing personnel
- Average fee per client
- Industry average of at least 6-1 is a minimum goal
- Funding the client case
- Average client cost advanced
- Timing of the revenue cycle
- Case acquisition date
- MMI date
- Demand goes out
Tracking all of the above are the key metrics for a personal injury lawyer. If you achieve certain benchmarks for the above numbers everything else will take care of itself. Focus on the things you can control rather than just looking at a P & L that’s months old. Use technology to capture the information, measure it and then you can affect changes for improvement. Peter Drucker the renowned father of business management said, “What gets measured, gets managed”. Furthering this statement is “What gets managed, can be improved”.
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An example of the above would be a firm that has an average client acquisition cost of $1,000. This would be the amount spent on advertising divided by the number of cases secured. Let’s say the firm’s average fee is $10,000. The ratio of fees to acquisition would be 10-1. This is a good number. The numbers that can be measured and managed are the amount of leads. Can you improve the advertising effectiveness, etc? Can you improve your conversion ratio? How many of the leads do you close. You may break this down into types of cases if your practice varies.
How much capital is required to fund each case. If the firm in question expends an average of $2,000 on each case, it would mean the amount needed to fund 10 cases would be $20,000. Another important factor would be how long is this capital outstanding. If it takes on average 18 months from acquisition to settlement, then the capital is needed for a longer period of time. What can be measured here is the amount of time between MMI and demand. Could this be shortened. Also a close look at your vendors and medical bills could help with cost. You need to know these numbers to effect change. Anecdotal evidence is not enough.
Let’s complete our example:
- If the above firm picked up $30,000 in new business this month.
- Based on the above, their acquisition cost would be $3,000.
- Their client cost to be advanced would be $6,000
- This would mean the firm would need a minimum of $90,000 in capital to fund the acquisition of $300,000 in cases in a calendar year. The $60,000 in client costs advanced will come back to you but you have to have the cash.
This is a rather simple explanation of the capital needs of a personal injury law firm. The client costs are not all expended right away but they are outstanding for more than 12 months normally. That’s why capturing and measuring costs are so important.
While every business has to be aware of overhead needs and labor cost, a personal injury firm basically has inventory issuers like a retail store. Anything that frees up capital or lessens the time the money is needed can be a big improvement to cash flow. Speeding up the case settlement time is akin to inventory turnover in a store.
If you don’t know your numbers, you own a job not a business. A personal injury firm is a business not a regular law practice.
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