The Simple Law Firm Habit That Turns Profit Goals into Profit Earned (Ep. 173)

Most law firm owners find out how their quarter went after it's already over, and by then it's too late to do anything about it. Today I'll show you how to know how your quarter ends weeks in advance so you can nail your profit targets. Welcome to the Lawyer Millionaire podcast, the show where law firm owners learn to build wealth, scale their firms, and design the life of freedom they deserve. Hosted by Darren Wars, business and wealth advisor for law firm owners, and author of The Lawyer Millionaire, this podcast delivers the strategies and inspiration you need to break free from the grind and become the financial success you envision.

Let's dive in. Hey, friend. Welcome back to The Lawyer Millionaire podcast. I'm your host, Darren Wirtz.

Here, we're all about profit on purpose. That has been our theme this year. And by the way, if you really want to dive into profitability and profit on purpose, you really should join us in the lawyer millionaire community. Over 120 law firm owner members are there ready to help you in your journey.

And inside the community this year, we've been on a journey, a journey we've been on on this show as well, we're talking about profit on purpose. And this quarter, we're diving into the science of profit, the metrics that make it happen. You know, this is so, so critical. And it doesn't matter what size of a firm you have.

Because let me tell you something, I've sat on Zoom with eight figure firms, $10 million plus in revenue that can't make payroll without dipping into their line of credit. Yes, it's true. So if that's you, you're not alone and don't be ashamed. But there's a way to make sure that that doesn't happen.

Yes, there are $10 million firms that are borrowing to pay their people that are facing cash crunches. How does this happen, you ask? Well, first thing we have to understand and distinguish, and we've been talking a lot about this this year, is that a profitable firm, and a cash solvent firm are not necessarily the same thing. They are two different animals.

And so a couple of weeks ago, we talked about cash flow forecasting and how important that is. And you've got to have systems for cash flow and you've got to know your cash flow, but you also have to have systems for profit. The two are not the same. You know, you can be profitable, but broke at the same time.

That's a real thing. And it happens all the time. But today we really want to dive into profit because cash is great and we've got to have cash on hand. We've talked about cash.

We've talked about core capital. In the first quarter, we talked about profit first, which is essentially a cash flow system to help you make sure you have the cash there when you need the cash to pay the bills. But the bigger thing is profit. And the point I want to make today is that you will never hit your profit target unless you forecast it.

A target without a forecast is just a wish. You know, we sit down at the end of the year, we do our annual planning, we map out our goals, we have our three-year target, we want to double, triple, 10x revenue. But where's profit and who is thinking about it? Because at the end of the day, that's the only thing that matters.

And so today I want to help you. I want to help you stop guessing how the quarter ends and start forecasting it, being able to set it as a destination, having metrics that you can watch and know exactly where you're headed, and having the ability to adjust on an ongoing basis. This is the logical next step in our theme, Profit on purpose. And I've done this myself.

You know, I've had profit targets and I've had goals and I've met with the team and we've talked about our goals and, you know, we're like, well, okay, well, we'll see how the quarter ends. We don't want to be that way. We want to know how the quarter is going to end so that we can do something about it. And if you've been on this journey with us so far, let's just kind of walk back through where we've been.

First, we made cashflow intentional. We went through the book Profit First, talking about setting aside profit before anything else, separating owner pay from profit so that you really have a clear understanding of what your profit actually is, and just being intentional about it. Then we traveled through simple numbers. We talked about the 10% profit floor, paying yourself a market wage, reviewing the right reports, and watching things like your labor efficiency ratio.

So you've done a lot of work to get here. You've set some targets. But the next thing, the next thing we've got to do is start forecasting. Now, there's a couple things I want to share with you before we dive in.

And this is why this is so critical. According to Clio's Legal Trends report, the average lawyer's utilization rate, the share of an eight-hour day actually spent on billable work, is just 37%. That's 2.9 billable hours a day.

Wow. The average attorney bills somewhere around 1,693 hours a year, well below the 1,800 to 2,200 that most firms assume. Now, stack the leaks on top of that. Industry averages put realization, the work you actually bill for, around 88%.

And collections, the bills clients actually pay, around 91%. Do the math. And you'll find that only about 30% of your team's working time actually turns into real collected revenue. 30%!

Wow! So when you don forecast you not just disorganized you flying blind And you blind to a business that is naturally leaky Law firms are naturally leaky The difference between a firm that drifts and a firm that builds real wealth is this. Is the owner making decisions in the moment or finding out the score after the buzzer? You're not going to reach your destination that you set in January by looking at it again once you get to December and seeing how you did.

You're going to reach it by checking your position and correcting every single week. Forecasting is not busy work. It is the steering wheel. It's the rudder that drives the ship.

Okay, so let's talk about how to do it. First of all, we're not talking about budgeting. Budgeting is basic. You don't even need to budget.

You need to forecast. But forecasting is way better than budgeting. Budgeting gives you permission to spend. We're not looking for permission to spend.

We're looking to nail a profit target. Now, I've done some research and there's a lot of research out there, a lot of coaching for agencies and business advisors that will tell you you need to have a 12 to 13 week rolling profit forecast. and then a longer term one to three year strategic plan and strategic forecast for where you want profitability to go. You know, those can be helpful, but I think that long-term forecasts and long-term targets alone are useless.

A three-year plan doesn't make payroll in March. And by the way, we're never gonna hit that three-year target unless we're forecasting in the moment. What you need is real-time intelligence to adjust while there's still time. Budgeting is backwards looking, it's spending focused.

Forecasting, on the other hand, is forward-looking and profit-focused. Budgeting asks, what can we spend? Forecasting asks, where will we land? And what do I need to do to change that ahead of time?

So our focus here today is quarter-end forecasting. Set a target, know the destination, and adjust weekly. To do this, you're going to ask four simple questions. There's four pieces of information that you need to figure out.

Number one, how much revenue do we have coming in? We got to figure that out. We need to be able to forecast the revenue we have coming in, in the coming weeks, up until the end of the quarter. What are our direct costs?

Direct costs are things that don't really belong to you, right? Contract labor, outside, people that you've hired to do stuff that are, maybe costs, client costs you're passing on, right, to somewhere else. Maybe you've bundled your services with some other service that is run by someone else who's not part of your business. Then that would be a direct cost that gets excluded, right?

And case costs, right? Because, you know, you may have a $500,000 settlement fee coming in, but if, you know, $200,000 went to case costs, well, you're not getting $500,000. Labor costs is number three. Obviously, you need to know your people and how much you're paying your people.

And lastly, operating expenses. When you do this, there's a lot of things you're already going to know. You can look at your previous history to find these things out. You know, if we are at the beginning of this quarter, when I'm starting my forecast for the rest of the quarter, I'm just going to go back to last quarter.

I'm going to start there. And I'm going to look through the entire quarter and I'm going to look at all my expenses. I'm going to look at all of those things that are going to replicate over to the new quarter. Now, some things might have changed, right?

And so what I'm going to do is I'm going to look at the last month also. And I'm going to look and see, you know, are there any new things that I've added, any new recurring expenses that have come into play in the last month? And then I also want to make sure I'm not missing anything that happens on an annual basis. So I'm going to look at this quarter last year.

If this is Q1 of 2026, I'm going to go back to Q1 of 2025 and see what happened in that quarter, what things are going to carry over into this quarter. And you can use that as a foundation to build your forecast. A lot of things are recurring, so you're going to know them and they're fixed. And there are some things that are variable.

For instance, revenue can often be variable. And so how do we figure out that? Well, there's a few steps. Number one, what's in your pipeline right now?

What are the current clients that you have in your pipeline? How many deals? How many clients? And what is the probability of closing each of those?

And what's your typical close rate? You can ask these questions to estimate how much revenue that you have potentially coming in. Now, I will caution you, don't be overly optimistic. Know yourself.

Know thyself. If you tend to be a more optimistic person about your sales, then they actually end up turning out. Base your decisions in real math and real data, and maybe be a little bit more conservative than the real data would suggest. If your close rate is 50%, maybe we only forecast a 40% close rate just to be safe.

So you can look at your funnel. You can look at your work in progress. And those are some of the things we need to look at too, right? Work in progress and accounts receivable and how much do we actually collect, right?

So we need to be looking at our collections rate. We need to be looking at our billing rate to kind of estimate and forecast how much income we expect to be coming in, right? If I have $100,000 in work in progress, but my collection rate is only 90%, well, I shouldn't be forecasting $100,000 coming in the door. I should be forecasting $90,000 coming in the door.

This can be very, very simple to build. You just need a simple spreadsheet. It can start really, really simple. Now we created one for you that can be a starting point or you could create your own If you want to use ours it down in the show notes You can click the link and you can download it And that can be your starting point But you have to make it yours right Our version may not work exactly for you based on your business's rhythm and how things flow for you.

The reason I like a quarterly forecast is things can be so volatile month to month. And a quarter gives me a nice block of time I can look at and I have plenty of time to adjust. On a monthly forecast, I don't really have that much time to adjust. And plus it takes more work because every month I'm having to recreate it and then update it throughout the month.

So you don't have a $10 million plus business. You probably don't need a monthly forecast. Quarterly forecasts will probably do just fine. And it can be super simple.

It could be simply a list. Here's everything. Here's all my expenses. Here's all my expected income.

Here's where I'm forecasting the quarter to end, right? Or it could be a little bit more detailed. Now let's talk about some of the detail that we could add. There are a few things that you should add to your forecast that'll really, really help you hone in on the very specific things you need to be paying attention to.

Number one, gross profit. That's it, right? That's the biggest one. Number one, we need to gross profit.

What's the dollars? And gross profit is not net profit. It is basically, it's my revenue minus my direct costs. Okay.

So what is the actual money I have coming in the door at the top? It's for most firms, you may not have much in terms of direct costs, like case costs. And so it could simply be total revenue, but we want to make sure we're not include, you know, if you're, if you're a contingency fee firm, and I've seen this happen, right, believe it or not. And you're, you tell me, oh, I did $10 million last year, because you won $10 million for your client.

No, you didn't do $10 million because you only collected a certain percentage of that. And then you had costs that came out of that. So, you know, that's why we say gross profit instead of total revenue, we want to be real clear, about what's actually yours. Number two, net operating income percentage of revenue, which is basically your pre-tax profit, your net operating income as a percentage.

So this is basically your profit percentage. It's your pre-tax profit percentage. We don't count taxes as a cost, okay? Because taxes come out of profit, okay?

Now you should be running payroll for yourself. Okay. You should be paying yourself. Let's see how this all stacks together.

Because if you're paying yourself a market-based wage on payroll, you're already having your federal taxes and everything else deducted. So anything else, any additional taxes, I'm not going to count. I'm going to count those. Any payroll taxes, I'm going to count as a real true cost.

But taxes above and beyond that, my estimated tax payments that I pull out of the business to pay, Those are not going to count as costs because they're coming out of profit. They're flowing to me as the owner to pay. I get that as the owner because I have to pay taxes that the business caused me to owe. So net operating income, pre-tax profit.

That may be your most important number right there. We want it to be at least 10%, but you should have a target for this. Right. Average firm is probably running around 25 percent.

Small firms or solos are perhaps 25 to 40 percent, but definitely above 10. The third number we really want to track is your labor efficiency ratio. We want to track that every week. We want to track that on a rolling basis.

We talked about labor efficiency ratio. OK, we talked about it. It's it's the productivity of your total labor cost. It's total labor cost divided by gross profit.

And it's telling you what percentage of my gross profit is going to labor. It should not be more than 50%. Typically, it's going to be somewhere around 40 to 50. We want to be closer to 40.

Best in class, somewhere around 30%. We want to really keep track of that number because labor cost is your biggest cost. Especially as you grow, that becomes your biggest cost. Number four, we want to track accounts receivable on a regular basis every week.

and a very helpful number for this is days sales outstanding dso what is dso well here's how you do it number one you find your average daily sales for the time period so for the month or for the week whatever we're looking at in the time period okay what's our total sales and divide that by the number of days so if i'm looking at the month i'm going to divide by 30 if i'm looking at the week i divide by seven we're going to be looking at the quarters we'll divide by the number of days in the quarter.

Then divide by your unpaid bills. Sorry, divide your unpaid bills by your daily sales. Okay. So if my daily sales are, you know, $100, take the total amount of money a customer still owe you and divide that by your average daily sales.

A lower DSO number is always better. It means your customers are paying you quickly, leaving you with more cash on hand to run your business. A high DSO means money's tied up and you can attack this as a KPI, right? We want to lower our day's sales outstanding.

We want to reduce that by getting people to pay faster. A lower DSO means your customers are paying more quickly and you're converting work into real cash on a more effective basis. And the fifth thing we want to track is core capital because we always need to have sufficient core capital. Remember, that's at least two months of operating expenses in the bank and the taxes are paid and the line of credit and credit cards are paid off.

If you're not there, you've got some work to do. And if you were a PI firm or contingency firm, well, it should be more than that, maybe three to six months And by the way next week we gonna be talking about how to do this specifically for contingency fee practices like PI and things like that Now there a few things that this does for you. When you're doing this on a weekly basis, don't get lost in all these numbers. These are helpful numbers to have.

You don't have to have all these numbers, but these are helpful things to keep track of every single week. But the basic thing is we want to be forecasting where we're going to end at the end of the quarter. If you want to have a 10% profit margin, if you want have a 25% profit margin this year, we need to forecast each quarter where it's going to be and pushing ourselves to do better. Forecasting weekly is going to help you stop reacting and start managing.

If you see that the margin is starting to slip, that your profitability is in decline, you're going to be able to do something about it early, not next year. You'll be able to pull a lever. You'll be able to chase collections, slow a hire, push a matter to close, cut an expense you don't need, right? If you're seeing that that profit forecast is not where you want it to be, okay, what do we need to do to fix it?

And if it's great, then we have room to expand. And one more thing, and I cannot stress this enough, forecast on collected dollars, as we mentioned, run your billing through your percentages, how much you actually billing, how much you actually collecting. Remember those leaks, realization rate is around 88% and collections are typically around 91%. A forecast built on what you've invoiced is a forecast built on money that may never actually arrive in your account.

Be honest with your inputs and the output will be honest with you. Garbage in, garbage out, remember. And let me give you one quiet lever to pull while we're here. Clio's data shows that firms offering payment plans collect significantly more revenue per lawyer.

For solo firms, the difference can be dramatic. So if your forecast shows a collections gap, that's not just a number to stare at. That's a signal that we need to change something, that we need to explore some new ideas. The forecast's job is to tell you you have a problem.

Your job is to act on it. Okay, my one thing for you to do this week. Don't overthink it. No software, no CFO.

Okay, if you have one. A blank spreadsheet. If you're doing quarterly, start with last quarter. Replicate all the expenses you had from where you are in the current quarter to the end of the quarter.

If you have any recurring income, replicate that as well. Look at the last month to catch anything brand new. And look at this time period last year to catch any annual bills. List them out.

Income and expenses. That's it. Doesn't have to be more complicated than that. We have a more sophisticated version.

If you want to check that out in the show notes, you can click and download that. And then set up a recurring time on your calendar every week where you're going to check in and you're going to update it. Now, the second step beyond this is to share the forecast with the team. And we'll be talking about that coming up here in a future episode.

So don't miss that. All right. Now, you know, I've lived on both sides of this. I've run blind before and it's not fun.

And if you're running blind, I can tell you, it is so much better to know exactly where you're going to hit profit-wise at the end of the quarter and to be able to make changes to change that ahead of time. Forecasting changed how I run my business, and it is one of the most empowering habits that we help our clients master. It helps you turn anxiety into agency. And it helps you become not a passenger, but the actual person with the hands on the wheel directing the car, the ship, whatever it is.

Here at The Lawyer Millionaire, we help law firm owners achieve financial freedom. And it all starts with building a more profitable practice. You don't have to be a numbers person. you just need a system and maybe someone in your corner like us.

Our team of business advisors, CPAs, and certified financial planners is here ready to help you transform your practice into profit, your profit into capital, and your capital into freedom. If you're feeling stuck in your profit and wealth goals, book some time with our team. Don't wait. Every quarter you wait is compounding.

And you don't get that time back. Take the wheel. Don't be crying out for Jesus to take the wheel. No, you go ahead and take the wheel because Jesus ain't gonna take the wheel for you.

You've got to take the wheel in your business and make it happen. And by the way, if you're a YouTube subscriber, YouTube watcher, be sure to check us out on YouTube where you get to see my face talking in these episodes. and not just my face, but the faces of our interviewees who we've had on this show. So head on over to YouTube, like and subscribe our channel on YouTube.

If you like our content, we would certainly appreciate it. Well, that's it for today, friend. But I've got just one thing for you to remember today, and that is this. If your law firm isn't building you wealth and freedom, well, what the hell are you doing?

Can I get an amen up in here? Well, go make it happen, and I'll see you next time. Are you a law firm owner looking to build real wealth and break free from the daily grind? On the Lawyer Millionaire podcast, we share practical strategies to grow your practice, maximize profits, and create the financial freedom you deserve.

Join host Darren Wars as he interviews top experts and successful law firm leaders who share their secrets. Don't just practice law, build a legacy. Listen now to The Lawyer Millionaire wherever you get your podcast.