Law Firms: Building A Business That Pays You
Creating a women-owned law firm is incredibly exciting and overwhelming.
When you are starting, it’s likely only you. However, as your client list grows you will expand, hire people, and upgrade the office space over time. This growth can be a blessing and a curse if you don’t pay attention. Expansion comes with its own cost.
One day, you will look around and realize that you have been making sure that everyone is being paid what they are worth EXCEPT YOU. Without question, this happens more often than not with women professionals. We take care of everyone and everything before ourselves.
If you are a woman-owned law firm in the USA, these three tips are for you:
1. Have a “Pay Yourself” mindset
As a woman, it can be challenging to pay yourself in a law firm. The problem comes from the overwhelming feeling that we must:
Put everybody before ourselves
Save for financial emergencies
Keep reinvesting profits back into the business
Don’t get me wrong; you absolutely should save for emergencies and reinvest in your business; however, paying yourself is just as much a priority. That means your salary should be included as part of your budget as opposed to thinking “I will pay myself with what is left IF there’s anything left”. When you adopt this mindset, you’re able to PAY YOURSELF with confidence and without guilt.
Remember, this law firm wouldn’t exist if it wasn’t for you. Accept that paying yourself and enjoying it should be a priority.
2. Pay yourself using the “Rule of Thirds”
You should also learn how to pay yourself correctly. Ideally, you’ll want to follow a strategy many women-based law firm owners use - the “Rule of Thirds”.
The strategy looks like this:
One-third of your revenue goes to all the overheads (office rent, marketing, phones, etc.)
One-third goes to profit (aka your profit)
One-third goes to people performing the work – including yourself (payroll, taxes, benefits, etc.); the more you increase your revenue, the more you can pay yourself.
By keeping the “Rule of Thirds” in mind, you can build compensation plans that allow you to get paid.
3. Charge and pay the correct amount
At the beginning stages of your law firm, it’s normal to feel you must keep your prices low to attract clients. Every new business goes through this phase. But eventually, you must increase your prices to reflect the value you provide, cover your expenses, and yield a profit.
As a rule of thumb, client revenue should be 3 - 5 times your salary or employment costs. Do not forget to contemplate the employee benefits in your employment costs because failing to do so may prevent you from setting your fees correctly.
When figuring out how much you should charge your clients, take your annual employment costs and divide them by the total number of hours your team is expected to work for the year. Then multiply that amount by the number of hours you anticipate your team to work per case. Lastly, multiply that amount by 3-5 to get the amount you should be charging for that case.
(Annual employment costs ÷ total number of hours your team is expected to work for the year) x number of hours you anticipate your team to work per case x 3,4 or 5
Charging less than 3 times the employment costs to a client isn’t enough and can quickly destroy your law firm. That said, if you feel the price you calculated is too high (it probably isn’t), then you need to review your compensation structure (i.e., could you be overpaying your staff?).
When working on your compensation structure, you should consider your team’s experience, skills, and talent.
Ultimately, doing this properly will reduce expenses and increase revenue, allowing you to pay yourself.
After reading the above, you should have a solidified idea of how to create a law firm that allows you to pay yourself. Law firm owners struggle with this a lot. For more information, schedule an intro call with DesCPA today for business advisory and strategic planning.