1.) Gross vs. Net. Your kids don’t give a crap about your gross revenue. The quality of your family’s life depends on your firm’s net. More specifically the “Total Owners’ Benefits” you take from the firm.
That is your normalized salary plus distributions plus all the other benefits you get for being a business owner. All things being equal your family would be better off if you build a $1MM firm that gave you $300,000 than a $2MM firm that gives you the same $300,000.
It is important to set your NET income goals first and let that dictate what the firm must gross. Don’t set an arbitrary ego/vanity gross goal and then wait to see what the profits are.
2.) All things are NOT equal. How you earn the total owner benefits is also important. So if you have to work 80 hours a week to run your $1MM firm and earn $300,000 total owner benefits but you could work 80 hours a month to run your $2MM firm and earn the same $300,000 then things are not equal.
This week we got a call from the owner of a $5.5MM firm who reports that s/he’s taking home about $2MM. Except s/he is working 80 hours a week and can’t even imagine taking even a single weekend off to attend a Discovery Day to learn how to have a better life.
What do you imagine is going to happen when (not if) life kicks this lawyer in the gut and “forces” some time off due to a personal or family emergency? Kaboom. Down comes the law firm and everything riding on it.
ON THE OTHER HAND there may be a good argument for running that $2MM firm at only 15% if it affords you the luxury of working in the firm only 80 hours a month.
What would you do if you only had to work 20 hours a week to take home $300,000? Would you lay around like a bum? Go shopping every day?
Or would you consider reinvesting that time to find ways to grow the firm and get alot more profits out of it so that you could take it to $4MM at 25%, take home a cool $1MM and if you learn how to think about this the “right” way, knock those 80 hours down to 60 per month in the process?
3.) Static overhead vs. Dynamic overhead. There is a difference. And if you don’t know what that difference is then you could inadvertently kill the golden goose in your attempts to be “economical”.
There is a whole presentation about the difference and a great workbook too from the October 2017 LQM Friday Bonus session.
The short version goes like this:
Some categories of overhead are meant to pay for themselves and make a profit over & above their own cost. Others are just necessary expenses. If you add more dynamic overhead you make more profit. If you add more static overhead you just have more overhead. Sometimes this can be confusing especially if you have a static person in a dynamic position and mistakenly conclude that the position itself is static. Examples of dynamic overhead include sales, marketing, improved management, good staff training and better financial controls. The more of each of these that you add, the more it CAUSES the firm to grow. Static overhead may be required to allow the firm to grow but it doesn’t cause the growth. For example, adding more office space doesn’t cause growth.
4.) Full Utilization Of Resources. Most law firms are treating their overhead (both static and dynamic) like a half-eaten piece of fruit. They eat half of the fruit, throw it away, sometimes even just out of boredom, and then complain of hunger.
However there are some well-known and reliable ways to maximize the value of what you already have in your law firm. That is, ways of pulling more profits from the same overhead. Or way more profits with only minimal additional overhead.