Let’s face it – running a small law firm can be challenging. As with any business, the principal challenges for small law firms are bringing in consistent revenue and generating worthwhile profits.
But how much should you expect to make? And what are the factors that influence revenue? Moreover, what kind of profits can you expect from all that revenue you’re bringing in?
In this post, we’ll explore those questions in depth so that, hopefully, you can maximize revenue and profits within your small firm.
First, however, I’ll share some of the revenue-and-profit-related mistakes that I made back when I started my own solo practice. While those mistakes remain embarrassing to this day, I’m happy to share them with you here in hopes that you can avoid similar blunders.
Let’s dive in.
Things to think about before you start a small/solo firm
I remember when I first began thinking about starting my solo practice. I had been practicing with a large firm for some time and even though I was well-compensated, I had quickly realized just how little of my hourly billing rate actually ended up in my pocket.
I was naively convinced that if I just went solo, I’d be keeping a lot more of the money I was generating.
Of course, I didn’t adequately think about some of the invisible costs of running my own firm. And no, I’m not talking about paying for office supplies or making my own coffee. I’m talking about the significant time costs at play when you run a small firm.
When you practice with an established firm, it’s easy to take its conveniences for granted. Honestly, I never really thought much about things like marketing, billing, tech support, vendor management, client entertainment, or the word processing folks who made my legal briefs perfectly formatted for filing. All of those things were simply handled for me.
When you start a small firm (especially a solo practice), every single one of those non-billable tasks lands squarely on your own shoulders.
Even if you pool resources with a few partners, most small firms don’t have an initial budget that includes things like marketing directors or accounting departments. And trust me, that stuff takes a lot of time.
To add insult to injury, the more time you spend doing that, the less time you have to spend generating revenue.
The ABA backs me up on this. According to one of its surveys on practice management, lawyers who work at firms with 11 or more attorneys spend 69% of their time practicing law, while attorneys at smaller firms only spend 61% of their day doing legal work.
Solo practitioners, meanwhile, only spend 55% of their day doing what lawyers do.
The rest of their time is eaten up on those annoyingly necessary non-revenue-generating tasks.
With all these other responsibilities, one has to wonder what a small firm’s revenue and profit figures actually look like.
Average small law firm revenue
Alright, so let’s talk numbers for a minute. We’ll start with revealing how much money the nation’s small firms are actually bringing in and then discuss how much of that money they’re keeping.
Small firm revenue
Given the public perception that all lawyers are swimming in money, the average revenue for small law firms might surprise you.
On average, solo practitioners in the United States only generate between $70,000 and $150,000 in annual revenue.
Small partnerships are doing a bit better, with average revenues ranging from $200,000 to $500,000 or more.
Of course, there are outliers. For example, a reported three percent of solo practitioners pull in between $600,000 and $1 million annually. Perhaps we should all be studying their business models.
Let’s talk about profits for a minute
I don’t know about you, but it’s hard for me to consider average small law firm revenue without immediately wondering about profits. Generally speaking, the average profit margin for small law firms is around 30%, though this can also vary widely based on a number of factors; something to bear in mind.
For example, management practices have a significant impact on profits. Small law firms with well-managed expenses can achieve profit margins of up to 40%. This emphasizes the need for strategic financial planning and cost control to maximize income.
Meanwhile, solo practitioners often experience lower profit margins compared to their small partnership counterparts. This may be due to the aforementioned non-billable hours that solo attorneys spend on the administrative side of their businesses.
Factors influencing revenue
Of course, looking for the “average revenue” of a small law firm is a bit like asking the “average price” of a new car – there are tons of factors that influence the numbers. So, now that we have an idea of how much small law firms are bringing in, let’s take a look at some of the key factors that influence revenue generation.
Practice area
The area of law a firm specializes in significantly impacts its revenue potential. For example, firms specializing in areas like intellectual property or mergers and acquisitions often generate higher revenue compared to those specializing in family law or criminal defense.
The reasons for this are obvious. Corporate clients can absorb higher billing rates and tend to have larger, more complex matters that can take years to resolve. A firm catering to these clients might generate a healthy revenue stream with just a few key clients on their roster.
Meanwhile, firms focusing on areas like landlord-tenant law may have a longer list of clients. That said, most of their clients are individuals whose matters tend to resolve quickly. This, combined with lower billing rates, often results in lower overall revenue.
Location
Geographical location also plays a critical role in determining a law firm’s revenue. Firms based in urban areas or regions with a high cost of living charge higher fees by necessity and, consequently, generate more revenue compared to those in rural areas.
Of course, that does not mean they’re generating higher profits.
Additionally, state-specific factors, such as local economic conditions and regulatory environments, can affect a firm’s financial performance. For instance, law firms in states like California – with its ever-evolving labor and employment laws – may find endless opportunities to handle employment disputes.
Firm size and structure
The size and structure of a law firm also influence its revenue. Solo practitioners often have lower overhead costs, but, like me, they may face challenges in scaling their operations and handling administrative tasks.
On the other hand, small partnerships can benefit from pooled resources, diverse expertise, and the ability to handle more complex cases. However, they also incur higher overhead costs, which can impact profitability.
Navigating economic fluctuations
Moreover, economic downturns and fluctuations can impact client demand and revenue streams. Small law firms need to be agile and adaptable to weather these changes.
Building a diversified client base and offering a range of services can help mitigate the impact of economic fluctuations. Additionally, maintaining a healthy cash reserve and managing cash flow effectively are crucial strategies for ensuring financial stability during challenging times.
Here’s how smart law firms prepare for financial downturns:
Effective marketing strategies
Marketing is essential for attracting new clients, yet many small law firms struggle with developing and implementing effective marketing plans. Leveraging digital marketing tools, such as social media, content marketing, and online advertising, can increase a firm’s visibility and attract new clients.
Regularly updating the firm’s website with valuable content, such as blog posts and case studies, can also establish the firm as a thought leader in its niche.
Leveraging technology and automation
Technology and automation can significantly enhance a small law firm’s efficiency and profitability. Tools like practice management software, document automation, and e-Filing systems can streamline operations and reduce administrative burdens.
By embracing these technologies, small firms can free up time to focus on higher-value tasks, such as client acquisition and case strategy.
Implementing efficient billing and collection processes
Effective billing and collection processes are essential for maintaining a healthy cash flow. Small law firms should implement clear and consistent billing practices, use technology to automate invoicing, and offer various payment options to clients.
Regular follow-ups on outstanding invoices and having a clear collections policy can also help ensure timely payments.
Diversifying services offered
Offering a range of services can help small law firms attract a broader client base and increase revenue. This might involve expanding into complementary practice areas or offering additional services, such as legal consulting or alternative dispute resolution.
Diversification can also provide stability during economic downturns, as the firm is not reliant on a single revenue stream.
In my experience – despite the mistakes – running a small law firm is worth the effort. While there is an undoubtedly intense learning curve, ultimately, the freedom (and cash flow) make running a small firm one of the most rewarding ventures of your professional life. Good luck!
