4 Financial Metrics Every Owner Should Know

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4 Financial Metrics Every Owner Should Know

In this episode:
John Scott

John Scott, CPA, AEP, is a Partner in the Tax Services Group at Anders CPAs + Advisors, where he leads the firm’s estate planning practice and legal industry efforts for the virtual CFO team. With extensive experience helping clients be more efficient, competitive, and profitable, he offers resources and financial insight to address complex issues facing law firms.


Here’s a glimpse of what you’ll learn:

  • How John Scott began working with law firms
  • Why you should outsource your financial functions
  • The importance of understanding your cash position to grow your firm
  • What is the ideal percentage of total owners benefit (TOB)?
  • Four financial metrics for scaling a law firm
  • John shares alternative legal fee structures
  • The benefits of virtual CFOs

In this episode…

Finances are one of the most crucial components of law firm growth, but many lawyers don’t understand how to analyze their P&L statements and other relevant documents and metrics. What concepts should you employ when preparing your finances for growth?

According to CPA and law firm financial advisor John Scott, the four fundamental metrics for scaling a law firm include cash, financials, production, and your pipeline. You must put aside 10-30% of your cash flow to cover overhead and other expenses. Additionally, John suggests outsourcing your finances to a qualified bookkeeper who can reconcile your documents monthly to accelerate decision-making. The production metric involves generating cash flow from your services, whereas the pipeline necessitates evaluating each team member’s capacity.

Join Luis Scott in the latest episode of The Guts and Glory Show as he hosts John Scott, a Partner at Anders CPAs + Advisors, to discuss the financial metrics for growing a law firm. John describes the ideal TOB percentage, alternative legal fee structure, and the value of hiring a virtual CFO.

Resources mentioned in this episode: 

Sponsor for this episode…

This episode is brought to you by 8 Figure Firm.

Founded by Luis Scott, 8 Figure Firm helps transform your law firm into a seven-figure or even eight-figure firm. 

After spending years searching for the ideal law firm consulting program, Luis started 8 Figure Firm to use his hands-on experience to help other law firms achieve exponential growth. 

Visit www.8figurefirm.com to receive a consultation call and start scaling your business today.

Episode Transcript

Intro 0:01

Get ready to be amazed. Get ready to be transformed. Get ready to believe it is possible. You’re entering the growth zone on The Guts and Glory Show with your host Luis Scott.

Luis Scott 0:17

Guys, welcome to The Guts and Glory Show a show dedicated to helping you learn just a little more, so you can be bigger and better than you were before. I’m your host Luis and I have the pleasure of introducing a guest who shares my last name, but there’s no relation. So I don’t find a lot of people with the last name Scott, to be honest with you, and definitely nobody from Puerto Rico. I know that for sure. So other than my immediate family, but we want to welcome to the stage, John Scott. He’s a partner of Anders CPAs + Advisors. And he works primarily with with law firms. And so we’re going to be asking about that, and some very key things that can help you accelerate your law firm here in 2024. So, John, welcome to show.

John Scott 1:03

Thank you, Luis, and I am a partner at Anders. I’m also heading up summit CFO services by Anders. So that’s what we’re going to talk about today is growing and scaling your law firm.

Luis Scott 1:14

Awesome. Awesome. Well, the first thing that I that I love to know is how did you get into working with law firms? Because let me tell you my backstory, I have an accounting degree, I went to undergrad. And one of the things that I learned is I didn’t know that there was like specialization when you go into the world, right? So you go, you go to undergrad, I wish they would teach you this, like, Hey, you can become a specialist with a particular industry. And so accounting wasn’t really for me, even though I love metrics and numbers, but it wasn’t for me. But I didn’t know you could specialize. So how did you come about working with law firms exclusively?

John Scott 1:48

You know, I started in the early 90s, and Anders. And as a large local firm, one office, we got most of our referrals from attorney. So we got to know a lot of attorneys. And I was very fortunate in the mid 90s, to meet a very entrepreneurial attorney who had a niche practice just here in the St. Louis market. And he figured out a way by paying attention to data and processes, how he could grow and scale his business. And today, he’s in almost every state in the United States. And he did it by paying attention to the data and making good and bad decisions. But when he made a bad decision, he was able to look at the data and and course correct. And so I watched him over 17 years scale that business. And I’d never take credit for what he did. But I got a great education, watching him grow and scale that business. And I’ve used it with the other law firm clients I work with.

Luis Scott 2:42

You know, data is so important numbers are so important. And I find myself when I’m working with lawyers. I’ll ask them, Do you have your your financials, your p&l and stuff? They’re like, Oh, well, I get that the third week of the following month? And I’m like, do you look at them? I mean, I don’t know what I’m supposed to do with them. It’s like nobody knows what to do with these, these documents. How? How critical is it to understand your financials and your financial metrics, how critical is that to actually growing your business?

John Scott 3:11

Attorneys aren’t businessmen, and it is vitally critical that they pay attention to the financials, and what you just described three weeks after month end. That is historical bookkeeping. And they rely on their brother’s neighbor’s cousin who’s a bookkeeper doing it on the side, giving them historical information. It’s kind of like when your grandfather took the family on vacation. The night before he left, he pulled out a 10 year old Atlas. And he looked at stale data and made some notes and the next morning he took off and they he can only react to what he saw in front of them. Then our parents had AAA trip techs. It told him that outside of Atlanta, there was construction. And here’s a workaround. Today we have data that’s just like the Waze and Google Maps, apps. They’re getting instantaneous data from all over. And so you shouldn’t rely on the bookkeeper who gives you the three week old information you should reconcile or have someone reconcile that cash every week, you should always know that cash position so that you can make good financial database decisions.

Luis Scott 4:10

So let’s talk about costs because one of the concerns of many of my clients is bookkeeping is so expensive, and you know, the guy who’s giving me the data points three weeks after the month end, it’s costing me 1500 2000 3000. You know, I’ve heard 3500 for one hour a month or one hour meeting a month plus the bookkeeping. So what what is this? This may be a loaded question, but to the to the best of your ability. What should a person expect to pay for that weekly reconciliation with a bookkeeping company? 

John Scott 4:42

I think with the technology forums that are here today and online access to bank accounts, just the reconciliation piece is not going to be expensive. You know, we are pushing down cost with technology faster and faster. The real benefit to outsourcing your finance function It’s allowing you to get better data from which you can make decisions. It’s also allowing you to serve clients. I mean, think of the hospitalist system. In a in a medical practice where the doctor used to have to go to the hospital to visit their patients make rounds. Well, a lot of Doc’s have said, I can make more money serving patients in my office, and I’m going to serve out that rounds. Activity to a hospitalist. And this is the same thing we’re talking about with lawyers serve your clients work to your highest and best use. And let’s outsource or hire a team internally, that can give us instantaneous good data.

Luis Scott 5:40

When I was working in my law firms, I was a partner of another firm. I like to see it every day. I mean, I to me, it was really, really important to see it every day. But also, it kept you know, I had the accounting background, and I was much more business geared. When we talk about that month and report though, I do think it has value even if it’s a historical value, what is the latest that a person should expect slash demand that their bookkeeping team provide that information to them?

John Scott 6:10

Four or five days, I mean, you should know your cash position every day. And I’m glad that you looked at it like that. Many attorneys don’t do that. We at our firm, see our cash position every day. And I think the most important part is the concept of delayed gratification. Right? When you started your firm, the money came from one of two places you either put your own money in, or you borrow a line of credit, well over time, you need to build a working capital cash position that supports growing your firm. And that’s going to be between 10 and 30% of expected revenue. And the difference between a 10 to 30%. Firm is risk. 10% firm is somebody that has good billing hygiene, good clients that pay within your terms and your maybe your hourly billing and you’re constantly sending out bills and getting in cash 30% firm has more risk in that they have it’s a contingent firm that has bigger winds, but we don’t know when those wins are coming. So they’re going to need more cash on hand. And it takes discipline to say, hey, we earned $100,000. But we can’t take it all out. And too many attorneys say there’s $100,000 sitting there, I’m gonna take it out, well, then when you got to make payroll or pay rent, you’re either hitting the line of credit, when you’re putting money back in and putting money back in, it’s not a good option.

Luis Scott 7:27

When you’re talking about just to flesh this out a little bit for the people who are not as experienced in the in these metrics, when you’re talking about 10 to 30%. What are you referring to exactly they should be doing with that 10 to 30%, they should be keeping it in in their operating account on

John Scott 7:42

Keeping it on hand to cover two to three months worth of not just overhead and in payroll. But owner distributions. I mean, we’re here to make money, we left big law or we started our firm to be profitable. Yeah, and if we’re not going to manage it in the right way, you know, we may as well go work for another firm.

Luis Scott 8:04

One of the things that I teach is that, that if you want to grow very, very fast, you need to invest in marketing, you need to invest in people. And so many times the person who has to take the hit is the owner. And but I still want the person to turn a 20 to 25% TOB total owner’s benefit, which is profit plus cash plus and benefits, etc. And one of the questions that I get a lot is, when is it appropriate to have a lower TOB and when is it appropriate to have a higher TOB? So when is it appropriate for a law firm owner to actually extract from their business more than 20% 25%? And then when when would it be appropriate to extract less? What would you what would you recommend there.

John Scott 8:48

So when you’re in growth mode, you’re trying to scale maybe open up in a different city or a different area of law, you’re going to take less that TOB is going to go down because you’re investing in a new opportunity. Once that opportunity matures, then you’re going to reap the rewards of that. And so your TOB will go up. The firm I talked about that, that went to many different cities, they had the process down that they could go into a city hire an attorney, rent temporary space, and within six months, they were hiring the second attorney. And that’s when they would hit breakeven and start making money. So it’s really about discipline, following the system. And once you when you’re investing, you’re TOB goes down, when the investment matures, you can take money off the table and TOB goes up.

Luis Scott 9:34

I think one of the things that I see is that people start investing, they see the success, they keep investing, and they never take their foot off the pedal, and then they’re like, why am I not making more money? And I’m like, because at some point you have to, you have to like actualize the, the you know, the success that you’re that you’re getting. So I think that that’s a good point is that you have when you see it mature, make some money for yourself so you’re not constantly behind the eight ball with finding

John Scott 10:00

You know, more and more firms are going to going to be saleable. Okay? If we didn’t talk 20 years ago, law firm sales were internal you sold to your younger partners, maybe you transition to another firm and you retired. But I think we’re gonna get to the point where firms are saleable. And the better processes you have, the more growth, you’re gonna get that windfall at the end when you sell that practice. And I think it’s important to note that if your practice is John Scott law firm, that doesn’t have as much saleability, as a name that’s not tied to my personality. So firms that have, you know, XYZ law firm that have no relation to a name, and have built processes and built big growth, and have good people, those are going to be more saleable. 

Luis Scott 10:50

Awesome. Let’s talk about the former financial metrics for growing your firm, because I think this is something that a lot of people have great interest in, how do we look at our firm? What is it that we’re looking for? We have a conference coming up conquering cash movement. I mentioned this to you at the beginning of the of the pre show. And I think it’s highly relevant to a lot of lawyers like what am I actually looking at? When I’m looking at my business? What would you say those four metrics are?

John Scott 11:21

The four metric areas are cash, financials, production and pipeline. So cash we talked a lot a little bit about by cash is the biggest driver of you’re surviving and thriving, and you got to have the necessary cash, you have to be disciplined to leave it back. The financials, we talked a little bit about that. You need financials quickly, that have good, relevant information, so you can make business decisions. Production is how do we turn our effort into cash? If we’re an hourly billing firm, it is expected charge hours utilization realization, and then pipeline is a function of, hey, we have 10 professionals here with this much expected charge time out of them. What’s our capacity? Where are they falling in their expected charge time. And when you look at Pipeline, if I have capacity of a million dollars, and my close rate is 50%, I need a pipeline, that’s $2 million, in order to fill that capacity. So that’s what you’re going to make hiring decisions on. And more importantly, client acceptance decisions on, if I’m out of capacity, I’m going to be a little more aggressive with my fee, quote, then if I have a bunch of capacity I want, I don’t want to contract, I want to keep my people busy, then I’m going to be a little more aggressive on getting that work.

Luis Scott 12:42

So just to follow up on that point, when you are out of capacity, one of the strategies is to increase price, right? I mean, I guess that’s what you’re saying? How do you increase price without without pricing yourself out of the market? Because I think one of the questions that I’m always confronted with is MRA, charging 450 An hour or 500 an hour, how do I increase price? Without getting out of the market? What would you say to those people?

John Scott 13:12

Well remember the situation you’re describing to me is I’m out of capacity. So really, it’s more of a function of, I’ve got this Booker clients, and some array clients, and some are C or D clients, who am I going to work on if I don’t have capacity, I need to weed out the lesser clients and work on the premium a clients that I do have. And then as far as the next client in the door, I want them to be an a client, I’m not I’m no longer going to take C and D clients, I’m going to refer those out to another firm. And so that’s another way to get there to be more selective in your in your client acceptance. But you should always try and push price. When you when you draft a bill, the standard rate that you quoted is irrelevant. It’s what kind of value Did we pass on to the client or create for the client? So the value proposition or the value decision is made when the bill is drafted?

Luis Scott 14:09

You know, the other day I was watching a video and he was one of the executives of KFC who launched KFC in South Africa. And he was saying that when they launched KFC, they they couldn’t sell the product. Nobody was going to the store, and they were confronted with this question, Should we lower the price? Or should we just like abandon the those stores? And he was like, why don’t we just higher the price. And one of the things that they said was if we can’t sell it at this price, how are we going to sell it at the higher price and he said well before you abandon the stores? Wouldn’t it be better to raise the price and be successful then to lower the price and be successful at the lower price like you’re going to have the terrible product and for whatever reason raising the price actually made it more desirable for people there and it blew up and the next thing you know they were putting plates is everywhere because there’s some psychological things at play when you when you have a premium price people are like, okay, they may say must be good, they must be good because there’s a premium pricing. And so I think that there’s also that it’s, it’s like, you may charge a premium, and you may realize you have an entire market that is willing to pay your premium price. Right. And you can make more without having to do as much.

John Scott 15:23

You know, I talked to lawyers and accountants alike, and I always want them to push price. And the retort I get is, Well, I’m gonna price myself out of some of my clients, they’re gonna leave. And I’m like, okay, great. You’re going to work for fewer clients do a better job for them and receive more money? Yeah. So isn’t that what we want? You know, if we did 80% of the work we did before, did a better job and made more money. That’s a win. Absolutely.

Luis Scott 15:51

And, you know, I remember when I first started consulting, I was charging $2,000 per month, and I would 30 clients, I was making $60,000. And now my fees, 10,000 per month, I only need six clients, right? That same amount of money. And so it’s I absolutely agree with with what you’re saying. Now, as it relates to the billing structure, because you talk about, you know, being beyond the billable hour and alternative legal fees, walk us through what are some alternative legal fee structures that you’ve seen work? 

John Scott 16:23

You know, I think value building is the Nirvana that we all need and want to get to, right? It’s a negotiated thing, what what’s the client crisis that they have that you’re going to work on? what’s that worth to them? And what’s it worth to you to do it. But in order to get there, we have to migrate from the hourly billing structure to maybe a subscription based model where, you know, over time, some months the effort is below the line, some it’s above the line, but over time, it’s fair to both sides. And so clients like this subscription model, because they know what they’re going to spend every month, they don’t worry when they pick up the phone that the clock is running. And firms like this subscription model, because it’s easy to predict your cash flows, right? Every month or every week, you’re getting in the same amount of cash from that client. And so I think the alternative billing model for the subscription model is a good one to migrate to, you know, some experts will say, you can’t just dip your toe in it. I disagree. I mean, I have clients that we don’t in fact, our VCFO model is on the subscription model. And then we have hourly clients that we do hourly work for as well. I think the important thing is consider getting away from the billable hour, it will free you up to do bigger and better things.

Luis Scott 17:42

Absolutely. Now you’ve mentioned the the acronym VCFO, I don’t know if everybody knows what that is. So tell us a little bit about what that is and what that service is.

John Scott 17:50

It’s virtual CFO services, what you’re essentially doing is hiring an entire finance team on a fractional basis. So when we work with the client, you get a VCFO, you get a senior accountant, you get a junior accountant, you get a technology person, and so you’re getting the value of the finance department. But on a fractional basis, we have three levels of service, we have a transaction only level, where we don’t really meet on a monthly basis, but you get good financial data on a regular cadence. We have a controllership level where we meet twice a month virtually to go over the financials to go over your cash flow. And then we have a VCFO level where you meet four to six times per month. And each of those meetings has a different purpose. One could be cashflow, one could be charged our pacing, financials, and then any other issues that come up. And we do we do it on the subscription model where we work through a pricing matrix with the client, they pick and choose the options they want. They see the price, and we actually get paid on a weekly basis. So we get 157 for that annual price or 1/52 annual price. 

Luis Scott 19:02

I’ve never, I’ve never heard of anybody billing on a weekly basis. Very interesting. That’s a good way. That’s a good way to stabilize cash flow right there. Yeah. In terms of the types of clients that would be perfect for these levels, like what are you seeing there’s a firm need to be an established firm million dollar firm, do they need 200,000 in revenue? Like, what what what is the best type of client for you?

John Scott 19:27

We think one to about 50 billing attorneys or paralegals is is our sweet spot size. Obviously on the one attorney level, it’s going to be on the lower end maybe just transactional. Once they hit 50 billers, they probably are of a size that they could use their own people internally. Got it. And actually, those are great losses for us because we’ve helped them grow to that size where they need their own CFO, they need their own finance team.

Luis Scott 19:56

You know, I think that there’s, there’s there’s one of those things where it’s like you hate to lose people but uh The same time, it’s good to know that you were able to walk them through that journey. And I’ve had our firm is called 8 Figure Firm. So when we when somebody gets to 10 million, many times they want to leave. And it’s like, I hate for you to go, but at the same time, like we did our jobs, so it’s, you know, it’s sweet and sour at the same time. So if anyone wanted to get in touch with you and work with Anders CPAs, + Advisors, where were they, where would they be able to reach you? 

John Scott 20:27

Well I’m hoping that in the shownotes, there’ll be a link to a book I’ve written called Digital Dollars and Cents. Additionally on LinkedIn, if you search John C. Scott, CPA, you can connect with me that way.

Luis Scott 20:39

Awesome. Well, guys, you heard it here first John, partner of Anders CPAs + Advisors. And there’s a different way to Bill there’s a different way to make money. You have to be engaged with your financials, you have to know your metrics if you want to grow your business, and we thank you for listening. You’ve been listening to The Guts and Glory Show.

Outro 20:59

You’ve been listening to The Guts and Glory Show for more. And to learn more about Luis hit the website at luisscottjr.com for consulting opportunities 8figurefirm.com. That’s the number 8figurefirm.com We hope you’ve enjoyed the show. Make sure to like rate and review and we’ll see you next time on The Guts and Glory Show.