Financial analysis tips to improve profitability

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At a recent webinar sponsored by LexisNexis, Philadelphia-based CPA Michael J. Wasco of Kino Sharie Leyh & Associates offered a series of tips and best practices that can help lawyers use financial analysis to build their businesses.

What’s most important is that you can access your data quickly, Wasco said. Fancy customizations aren’t necessary as long as a firm can find the information it needs, whether that be the number of hours worked or the percentage of fees collected.

Wasco advises steering clear of spending too much time developing or collating data, because it leaves little time for review.

Instead, focus on the bottom line, the debt-to-income ratio, revenue from year to year, and expenses as a percentage of revenue.

Year over year revenue is vital, Wasco noted, because it can help firms track and then project revenue trends for the future.

Expense trends are important as well.

“Why are office expenses increasing by 3 percent each year? That kind of analysis strips away the raw numbers to show how things change over time” and helps firms try to reduce costs, Wasco said.

Having a historical perspective also helps firms make decisions, like whether to buy new computers in the coming months or how to handle an increase in health care costs.

Make sure your system generates consistent reports.

“If one report gives you one number and a second gives you a different number – and even a third gives you another number – you immediately have a substantial problem,” said Wasco.

But with an adequate reporting system, firms can make future assumptions and forecasts of profitability, he said, answering questions like, “What types of suits are profitable? Which practice areas are growing or shrinking?”

Individual attorney analysis is also possible based on the number of hours worked or fees collected.

Depending on what information the firm is looking for, a bill analysis report can break down data by practice area or by billing rates, Wasco said.

These different factors “provide insight into what is going on in the firm,” he explained. For example, analysis might show that medical malpractice claims are the highest billing practice area but one of the lowest practices for realization of profits. Or one attorney might have significantly lower billable hours than another, which can suggest weak performance or the need to shift some work from one lawyer to another to even things out.

Analysis can also “improve targeted marketing, by spotting unseen opportunities in practice areas,” Wasco added.