Apple | Spotify
Episode Description
Join us as we venture into the world of law firm finance with a true industry expert, Brooke Lively, Founder and CEO of Cathcap. We explore the essential financial insights that every law firm owner needs, including:
1. The Key Numbers Every Law Firm Owner Should Know: Brooke breaks down the most critical financial metrics that can make or break your law practice. Learn how to navigate the maze of numbers and gain a deep understanding of your firm’s financial health.
2. Building Your Financial Dream Team: Discover the ideal composition of your financial team, and uncover the one indispensable role that no law firm owner should ever go without.
3. Forward and Backward-Looking Numbers: Get a handle on the three forward-looking and two backward-looking financial indicators you should track to keep your business on the right track. Find out how often you should be checking in on these numbers for optimal results.
4. Is Your Firm Growing or Shrinking?: Learn a simple yet effective method to gauge whether your law firm is on a growth trajectory or headed in the wrong direction.
5. The Rule of Thirds: Brooke shares insights on how to utilize the “Rule of Thirds” to maximize your law firm’s financial stability and growth potential.
6. Mastering Collections: Get practical tips and strategies for streamlining the process of collecting money owed to your law firm, ensuring you get what you’re rightfully owed.
PLUS…As a special treat for our listeners, Brooke unveils a free tool that will empower you to boost your profits right away. Tune in to discover where you can access this invaluable resource and take control of your law firm’s financial future.
Don’t miss this enlightening episode filled with actionable advice and expert insights that can transform your law practice’s financial health. Join us as we navigate the world of law firm finance only on A Different Practice.
Listen now!
Episode Resources
From Panic to Profit by Brooke Lively
Profit First by Mike Michalowicz
Episode Transcript
BROOKE: [00:00:00] If you don’t know how much cash you’re going to have at the end of every week, what are the chances that you’ll run out of cash? They’re pretty high. What do you do when you look in your bank account as you’re running payroll that’s going to come out at midnight that night? You don’t have enough to cover payroll.
LAUREN: Welcome to A Different Practice. We’re your hosts, Lauren Lester and Jess Bednarz, and we’re obsessed with all things business, wellbeing, and optimizing the practice of law for solo and small firm lawyers. Lauren started her solo practice right out of law school, built it from the ground up, and now works four days a week while earning well over six figures. Jess approaches the profession as a whole to identify opportunities for growth and help implement systemic improvements.
We’re here to share tangible, concrete tools and resources for ditching the legal profession’s antiquated approach and building a law practice optimized for growth and enjoyment. Think of this as grabbing coffee with your work besties mixed with all the stuff they didn’t teach you in law school about how to run a business.
[00:01:00] Pull up a seat, grab a cup, and get ready to be encouraged and challenged. This is a different practice. Welcome everybody to another episode of a different practice, a new week, a new episode. So we’re really excited about our episode, keeping on the theme of digging into more of the practical side of running a law firm and the business of law.So today we have a really great episode with Brooke Lively all about the finances of law firms. And we go over the numbers that Solo and small firms want to look at and how things might look different for larger firms. And as your business may grow, if that is a goal for you, I really enjoyed the real nuggets, the kind of down and dirty details that Brooke gets into to really say, you know, this is the number that you should be looking at.
And this is how you calculate this specific thing. And these are forward looking numbers, and these are backwards looking numbers. [00:02:00] How all of that gives you the financial picture of your law firm. And this is something I’ve talked about in prior episodes, but I was really bad in the beginning about knowing the numbers of my firm.
It was a lot easier to say, I had a spreadsheet that maybe I opened up. A couple of times a year. And it really kept my head in the sand because I didn’t want to know how bad it was. I had a sense that maybe it wasn’t as good as I was hoping it would be and not looking at it was a lot more comfortable than actually having that hard realization.
And it wasn’t until I read Profit First, which Brooke recommends in the episode you’ll hear, and really took the wool out from over my eyes and looked at the The finances of the business that the business actually grew. So it was one of those moments like we have a lot in life where there’s growing pains, but on the other side of it really is the success and the growth that you might be looking for.
So just, I know you [00:03:00] don’t necessarily have a practice to run, but did you take out any nuggets of wisdom from Brooks conversation?
JESS: Yeah I think one of my takeaways was, as I was listening to Brooke talk, I agree that she gave a lot of really helpful information. She talked about it in a very digestible way, and I just want to encourage everyone to give this episode their consideration, even if you feel like you already are good with numbers and especially if you hear this topic and you just want to run the other way.
You know, people deliver information differently. I think different people are going to resonate with you. And I think it’s worth giving this one a shot and listening. Cause it’s really great. And maybe in the past of this, you know, this topic hasn’t worked for you. This might be the time it does. Brooke definitely offers it in a very digestible way, as I talked about.
And she also has some really great resources that she talks about. For example, she has developed what she calls the profitability finder, which. You know, that sounds pretty [00:04:00] interesting and something I definitely want to check out here. Give it a listen. Let us know what you think. I think you’re going to like it.
LAUREN: And we’ll link everything in the show notes that Brooke references, the profitability finder, the books that she talks about, the other resources. So you can easily grab those. And before we jump in, let’s talk a little bit more about Brooke and what she’s all about. When entrepreneurs find themselves hitting a wall in their business, they come to Brooke Lively, Cath Cap’s founder and CEO.
Brooke has always been a catalyst for accelerated profit. Her actionable advice has helped businesses thrive for years. What’s more, Brooke is an EOS implementer who educates leadership teams with effective tools and processes, making her a well rounded force for business growth. She’s a highly regarded speaker and the author of several books, including her international bestseller from panic to profit.
Brooke has been featured in international media, including CNBC, Forbes, US News and World Report, and on several podcasts about [00:05:00] entrepreneurship and the law. We hope that you enjoy this conversation as much as we did. So here is Brooke Lively. Welcome, Brooke, to a different practice. We’re so excited to have you here today.
BROOKE: Thanks, Lauren. I really appreciate that.
LAUREN: So we wanted to get started. We noticed in digging in a little bit more about the awesome work that you’re doing, that it looks like you have a hundred percent female team. Is that right?
BROOKE: Well, it was right. We have one guy, the token male. We, we had to have a token male, right?
I mean, you just have to. It was too hard for women to get in to the corporate world for so long that I mean, we can’t totally exclude guys.
LAUREN: Yes. Wow. Of the, the massive female work power that you have, who is doing such amazing work. Will you share a little bit about what y’all do on a daily basis and how you help law firms?[00:06:00]
BROOKE: Sure. We’re really a catalyst for accelerated profit at Cath Cap. And what we mean by that is we want to help law firms be more profitable. And we do that by serving as an outsourced or a fractional CFO. Most attorneys didn’t go to law school because they love numbers. They went to law school because they were promised no numbers.
Right? Correct. And, um, so, a lot of attorneys get intimidated by the business, by the numbers side of their, of their firm. And I was working for my family. Right? And. Had hired a consultant to help with sales and marketing, and he worked almost exclusively with attorneys and his clients started coming to me and saying, can you do for us?
What you do for your family. And that was when I understood how intimidated attorneys could be by that. [00:07:00] And how they weren’t running their firms based on data. And so that was why I started CathCap. Where an attorney can read a brief and know everything they need to know, or almost everything they need to know about a case.
We can read your financials. And just like a brief, it tells us where to start poking holes, where to ask questions. It’s our starting point. And so that’s what we do.
LAUREN: Jess and I harp on this all the time. Law school teaches us how to be great students of the law, arguably doesn’t always teach us necessarily how to practice in the real world, but we get that experience when we hit the ground running with our license, but definitely doesn’t teach us anything about running a business or the business side of law.
So that’s why these conversations are so important, even for just the foundational basics that folks can understand about their own. business and then be able to take that data and either grow profits, [00:08:00] reduce expenses, add teams, whatever their goal is actually using the data to support those decisions versus just throwing spaghetti against the wall and thinking, I hope this decision is a good one.
BROOKE: Well, and you know, Lauren and Jessica, tell me if I’m wrong about this, but in my experience, When you make a decision based on gut instinct, and I am not saying that attorneys have bad gut instincts, they really don’t, they’re generally pretty good. But what I found is that they make the decision at 3 in the afternoon, and then they’re having dinner with their family, and they’re like, was that really the right decision to make?
Maybe I should have done the other thing. No, I think that was right. And then they go to bed and they wake up at 3 a. m. Jessica, I can tell you’re totally laughing at this. They wake up at 3 a. m. and they’re like, no, no, no, no, no, no, no. I should have gone the other way. And then at seven, as they’re rushing their teeth, they’re like, nope, nope.
First decision was the [00:09:00] right one. And then they’re in a deposition, and they really should be listening carefully, but they’re still thinking about that same decision. And when you make it on data, you make it once.
JESS: That’s a great point, and a large part of that probably is not having the data, and therefore worrying about it endlessly until it makes ourselves sick.
BROOKE: Yeah. And, you know, you guys are trained to know every potential outcome, right? When you take on a case, you want to look at it from every side. You want to figure out where you can go right, where you can go wrong. You’re going to study, if I do this… What are the potential outcomes? What’s worst case scenario?
So that you make an educated decision. It’s hard to do that when you don’t have any data. And so it’s our job as the CFO to go into your practice management system, your books to go pull that data and say, okay. Here’s what [00:10:00] we know. We have these sets of facts. If we do A, these are potential outcomes, and if we do B, these are potential outcomes.
Okay, law firm owner, here are our options. As a professional, this is what I recommend. It’s your firm. What do you want to do? Isn’t that a much better way to make a decision?
LAUREN: Absolutely. And again, it feels a lot more confident. Like you said, you are sort of basing it on something versus instinct, which sometimes can be right, but definitely allows for a lot of questioning of our thought process and our decision making.
What would you say are the most important numbers that a law firm owner should know about their business, whether they’re the ones pulling it or someone like you who’s pulling it for them? What do you come to them with, with like, here’s the real basics that you need to know?
BROOKE: I think it depends on where your firm is kind of in its growth and in its development and in its financial stability.
But [00:11:00] let’s start at the most basic 1. And that is, is your cash, right? You need to know what your cash flow forecast says. So we kind of break the numbers into six different sections. There’s six different areas that we want to look at the numbers in. And the first number is cash. And the report that we want to look at is the cash flow forecast.
And your cash flow forecast is going to tell you how much cash you are going to have at the end of every week, not the end of every month. And for heaven’s sakes, not the end of every day, because that will exhaust whoever is dealing with it. But at the end of every week from the next 6 to 8 weeks, and there are times when I get the, why does it have to be every week?
Well, okay, your expenses don’t go out evenly every week, week one and three, really expensive because, hello, rent and payroll. Your clients don’t tend to pay really heavily in weeks one and three. They like to pay in week four, right? [00:12:00] So, to match up the inflows and outflows, we need to make sure that we know how much is coming in and going out every week.
So that’s the first number there comes a time when your firm has plenty of money in the bank and you can stop looking at that number when you know that you’ve got three months of of operating expenses sitting in the bank. Is it important to do a cash flow forecast every week? No. Do you just kind of keep an eye on it?
Yeah. But until then, every week, how much is coming in? How much is going out for the next 6 to 8 weeks?
LAUREN: And is that how much is coming in going to be based on, I’m assuming, the work that’s being produced? So, would an attorney be looking at their tasks to know, okay, I’m about to complete these 10 tasks, which means this much is coming in, I’m earning this much. Are we looking [00:13:00] at matters and matter timelines?
Like, how do they actually pinpoint, how do I know what’s coming in?
BROOKE: So, it depends.
LAUREN: Our favorite two words.
BROOKE: So, I mean, I know the lingo, right? A dad’s an attorney. My brother’s an attorney. Almost every guy I’ve ever dated, including the ones in high school, grew up to be, by the way, six foot two left handed attorneys.
Don’t ask me why. Um, I definitely have a type. Uh, so it depends if you are hourly, then it’s going to be based off of build and your will. Because if it’s The 25th of the month, you know how much WIP you have that’s going to be billed on the first, and you know in the past that, and I’m totally making this up, 15 percent comes in in the first week, 25 percent comes in the second week, 7 percent comes in the third week, [00:14:00] and the rest to make up 80 percent comes in the fourth week.
I can’t do the math fast enough in my head.
LAUREN: That was impressive,
BROOKE: you know, close enough. So you know that that’s how it comes in. So you’re looking at a combination of, okay, I know it’s the fourth week. So that amount of what we build on first is going to come in. But then also, I know that this is what’s going to come in based on how much whip we add in.
LAUREN: And for listeners, just to be sure, WIP is work in progress, right?
BROOKE: Right. Work in progress. If you are a firm like a, um, Let’s say you’re a flat fee firm, an immigration firm, it’s going to be done two ways for you, and that depends upon how you bill, you’re going to have people on payment plans, so it’s really easy to look and see what payment plans are scheduled out, right?
Because you know, those six or eight weeks in advance. You also [00:15:00] look at your sales calls. Because you know what percentage of those are going to close, and you know what size down payment they put in. Now, there have been some cases, and actually California has changed their law. Earned upon receipt isn’t a thing in California anymore.
LAUREN: Interesting. It is not, it is not in Colorado either, but I know Jess will tell you in her old stomping grounds in Illinois, it is. So every jurisdiction is a little different.
BROOKE: Every jurisdiction is different. So because California and Colorado no longer have earned upon receipt, I promise you it is coming to your state.
So you might as well start working your way out of that now. You can only move the money into your operating account as it is earned. So you either work. Hours or you hit a milestone in the case, whatever it is in that case, Lauren, you’re absolutely right. I know that we’re going to, we’re going to file this [00:16:00] many petitions this week or whatever you file in immigration.
So I know that we’re going to be able to bring this much money over. All right, and then the last one is the contingency firm. Okay, so this is a little bit of like, you know, lick your finger and stick it up in the air. Slightly more, slightly more scientific than that. But, you know, where are your cases?
You’ve got the docket in a spreadsheet or some other way. There are a lot of practice management systems that will do this for you. Also, how close are you to settling? What’s the anticipated settlement amount? How confident are you in that settlement? Have you settled? Are we in that 30 day window where we’re going to get paid?
Have they appealed it? And so you just kind of start plugging that in. We have a tool that we work with all of our contingency firms called the settlement predictor so that we know with pretty good [00:17:00] accuracy. How much is going to come in and when?
JESS: Nice. Well, for all the listeners who are in Illinois, I don’t think that is coming to Illinois anytime soon.
Um, from personal conversations I’ve had recently, but I do recognize that is not the norm across the U S although I’m actively trying to change that,
but that’s a conversation for another day,
BROOKE: Jessica, I, you know, we had a client who spent three years trying to dig himself out of that hole. And the reason he was finally able to. Frankly, it’s because of the pandemic and there was so much government money flowing that he was able to take some of that and finish up the last piece of getting himself out of the hole, but
JESS: we certainly don’t want any, we certainly don’t want any attorneys ending up in any holes, right? So I just want to highlight a few [00:18:00] things that maybe ideas or assumptions from the conversation that we’re having, which is one, you talked about, for example, we know the percentage of sales we’re going to close. So just kind of pulling out, Hey, everyone, if you don’t know that, then there is certain data that you can be tracking.
Like maybe that hasn’t. Cross your mind before, but keeping data on that kind of thing will help you then answer these types of questions and get to these types of answers. Um, but then also I just want to make it crystal clear. So some attorneys may believe, you know, I hate numbers, Brooke, that is why I hire you and this whole team of folks who love numbers.
So I, do I really actually need to know these numbers? I guess, I think the answer is yes, so then the follow up question really is, what risk is a lawyer taking when they don’t know these numbers? Like what’s the biggest risk in your opinion?
BROOKE: Well, a couple of things. First of all, we don’t have to make [00:19:00] tracking the numbers difficult.
It can be as simple as a legal pad where you’re putting hash marks, right? Yeah. How many calls came in? How many people set up sales calls? And how many people that set up a sales call signed a fee agreement? The second thing is you don’t have to be the one putting the hash marks on the legal pad and adding them up.
That can be somebody else. You need to know what data needs to be kept and you need to know what to ask for. You don’t have to be the one doing it. So what can happen if you, if you don’t have numbers? Well, let’s talk about this first number that we talked about. Your cash flow forecast. If you don’t know how much cash you’re going to have at the end of every week, what are the chances that you’ll run out of [00:20:00] cash?
They’re pretty high. What do you do when you look in your bank account as you’re running payroll that’s going to come out at midnight that night. You don’t have enough to cover payroll in six hours. Well, I mean, there’s not a whole lot you can do. Your banker really is not very sympathetic when you call at 6 p. m. and say, I need a 30, 000 loan. They’re like, sorry, I’m having a margarita down at the bank. Corner bar. I’m not going to be able to push a loan through for you in the next seven minutes. When you know about it six days earlier, you’ve got a better chance. When you know about it six weeks earlier, that’s a whole different discussion.
And you have a whole range of options to be able to take care of that cash shortfall. I mean, you can slow pay your rent, you can call and collect some AR, you can push off some other bills, you can not pay your whole credit card bill, you know, is it a timing issue? Is it like, what is it? But you can’t do [00:21:00] anything about it six hours in advance.
What ends up happening is that you become very reactive. And being reactive is very expensive. So you start to incur more fees. You’re, you can’t make, the decisions you make aren’t as good because, well, to use a baseball analogy, it’s a forced error.
JESS: Yeah, that makes a lot of sense. And I love just hearing you even just spitball ideas on how you can help dig someone out of a hole if they end up in that situation.
And obviously, we’re trying to keep people out of that situation, but it makes me just really appreciate the value of having a financial team. And I’m just curious, too, like, what does a financial team look like? Like, what are the different types of people that attorneys might need to work with? They might hear accountant, they might hear bookkeeper, they might hear CFO, you know, and to them, maybe this is all kind of interchangeable. So what’s the difference and what does the ideal [00:22:00] team look like to you? And maybe it, maybe it changes as you grow.
BROOKE: It does change as you grow. Absolutely. So I’m going to say the first person you need.
Always 100 percent is a tax accountant. And when most people say and hear accountant, what they’re talking about is a tax accountant. There are all different kinds of accountants. Everyone who has an accounting degree does not do tax. No one who works for me does tax. They all have accounting degrees.
Well, 90 percent of them have accounting degrees, but they don’t do tax. So you need a tax accountant. You’ve got to get your taxes filed. And frankly, don’t screw around with that. I don’t care how smart you are. You really haven’t read the tax code. I mean, it’s bigger than a phone book. You don’t know it.
Leave that to a professional. So hire someone to do your taxes. The second person you need is a bookkeeper. I’m going to make an analogy. Uh, you guys have heard of Jim Collins. [00:23:00] Good to great is the book he wrote. Okay. So on that, in that book, he makes the analogy that you want to have the right people on the bus.
The people who are core value match, and you want to have them in the right seats. Your tax accountant is sitting in the back of the bus, looking out the back window. Actually, let’s be realistic. Your tax accountant’s in the chase car behind the bus, making sure that all the I’s are dotted and the T’s are crossed and going, Oh yeah, they definitely hit a pothole there.
Yep, I see that in my paperwork. Great. Okay, we’re all good. The next person you need is a bookkeeper. You guys are attorneys. You went to law school to avoid numbers. Let’s face it, it’s not your bliss. You all bill out at a much higher rate than a bookkeeper charges. And it’s going to take you at least twice as long, if not more, to get something [00:24:00] done.
So if you bill out at 300 an hour and it takes you two hours, that’s 600. I promise you, you can probably find a bookkeeper somewhere for 600. So do that. Now, the bookkeeper is kind of sitting in the middle of the bus, in a seat in the middle of the bus, recording everything that’s going on in the bus while you’re driving down the street.
And that’s all they’re doing. They’re just recording. Oh, that happened, this is happening, this is happening, kind of as it’s happening. Right? There is what is called a controller. And a lot of people don’t realize there is a difference between a controller and a CFO. The controller is in the back of the bus looking out the back window and talking to your bookkeeper.
And saying, okay, bookkeeper, you recorded all of this. Let me see it. Okay. Yep. Oh, yep. I see that pothole. You said we hit. Yep. Check. Oh, yep. You said we turned left. Yep. I see. I see that we turned left. Yep. Got it. They’re [00:25:00] really just checking the accuracy of what the bookkeeper did. And then there’s a CFO.
The CFO is standing up in the front of the bus. Right next to the driver who is the owner of the firm, the CFO shares the vision that that owner has. The CFO knows that they want to go to X. Okay, great. To get to X, I’m going to help you design the strategy. And that strategy means we’re going to go 1. 3 miles and then we’re going to turn left.
CFO knows that months, miles before the controller does. Or bookkeeper doesn’t know until like you’re turning left and they’re getting thrown out of their seat. Accountant doesn’t know until they’re like trying to chase down the trail a few months later. So those are the different people. Is that the order in which you need to hire [00:26:00] them?
Some people may not need to hire a controller. Really quickly, most people will hire what they think is a CFO, but it’s actually a controller, and then they will not understand why their firm isn’t growing. It’s because they’ve hired someone who’s buttoning up their financials, but doesn’t have that vision, who’s not really a partner helping them to grow.
LAUREN: And if the driver at the front of the bus, which I love this analogy, us as the law firm owner doesn’t want to really be involved in this process, like there are some people who are like, I want to be hands off. Numbers are not my thing. I’ve hired these people for a reason. It is their job. But is it smart or even safe to be that hands off?
And if it’s not, what is the kind of minimum that the law firm owner needs to be aware of when it comes to the finances of the business? Because we have certainly just business requirements. We want our [00:27:00] business to be profitable and successful. And so not being blind to what’s going on is important. But also we have an ethical responsibility when it comes to the finances, especially if there’s trust accounting happening and client funds, right?
So we can’t just be totally hands off. These folks are going to take care of it. I don’t really know what’s going on. What would you say is the minimum? Check in, you need to look at these numbers, you need to talk to folks this frequently to make sure that the law firm owner knows the finances, but doesn’t have to be in it in the middle.
BROOKE: Okay. Once again, attorney answer. It depends. I think let’s go back to the bus analogy for a second. The larger your firm, the more people that are standing at the front of the bus, because your management team is going to get bigger. The owner is always going to be the one driving the bus. They are always the one with the vision.
But you’ll have a CFO, you [00:28:00] might have a marketing person, there may be a lead attorney, a managing partner, uh, someone in charge of, of the legal department. There may be an HR head. So all of those people are working together to help build the plan to get the bus where it needs to go. The owner should be aware of what is happening in all of those people’s departments.
There should be weekly meetings. He or she should be up to date. The bigger your firm gets, the less detail you need. To use an EOS expression, it’s letting go of the vine. You gotta let go of that information, right? You guys have read Traction, right? Things that you should look at weekly are your cash flow forecast.
When we look at kind of marketing and sales, remember I said [00:29:00] that we have six areas that we look at in marketing and sales. We want to look at how many sales calls are booked because that’s a forward looking number. That tells us how many potential new clients we’re going to have because new clients this month is Revenue next month, right?
That also helps us build out our cash flow forecast. Um, we want to weekly look at, you know, when we’re talking about production, we want to look at work in progress. Because this month’s work in progress is next month’s cash. You want to look at that on a weekly basis. Then we start looking at monthly numbers.
The, the next one is net new cases. And this is, you know, we talk about case management. Um, And this is all about the capacity of your law firm. [00:30:00] And we start looking at things like what is the average matter value? How long does it last? And how much pressure does the average matter put on your staff? And then we start understanding how to build your firm.
So how many cases can it handle at any given time? Who’s going to max out first? Who’s the next person we’re going to need to hire? And the number that tells us that is net new cases. How many cases did we close? How many matters did we close? And how many new matters did we open? Are we growing or shrinking?
On average, we’re growing by, I don’t know, I’m going to make it up, seven new cases a month. We know that one attorney can handle 49 cases. That means I’m going to need a new attorney in seven months. Great. So, so now I know in seven months, I’m going to need a new attorney, totally online, ready to go now and count backwards and figure out when to hire them.[00:31:00]
And those are all forward looking numbers. There are a couple of backwards looking numbers that we want to look at on a monthly basis. One is budget versus actual. It’s a report comes out of every accounting system. What did we predict that we were going to do? What did we actually do? Were we over? Were we under?
Where were we over? Where were we under? Why were we over? Why were we under? Sometimes you’re over, and you’re ecstatic! And if you’re over and you’re happy about it, it is just as important to figure out why you were over and you’re happy about it, than it is to find out why you were over somewhere else and you’re unhappy about it.
Because we want to repeat the good activities just as much as we want to stop the bad activities. And then the last one is the one that most owners care about the most, and we talk about [00:32:00] ideal ratios a lot. We believe in running a law firm on the rule of thirds. So, one third of your revenue goes to pay your people, goes to payroll.
One third goes to overhead, and one third goes to profit. And what we want to see, the number we want to really… Monitor is owner compensation, because as an owner, you get to dip into a lot of those buckets. You get a salary, you get profit, and, you know, no judgment, you’re probably running some personal expenses through the overhead of the firm.
You know, I don’t care. That’s between you and your tax accountant, doesn’t, doesn’t involve me. Are you getting paid? For the time, the effort, and the risk you’re taking on by owning this firm. So those are the numbers that we encourage our law firms [00:33:00] to monitor at a basic level.
LAUREN: And for the owner pay, I think you touched on this, so just to make sure I’m clear and if anyone is unclear about it, that could come out of payroll, like you could pay yourself as a salaried employee. Yeah. And then. There could also be owner’s withdrawals out of profit. So it does sort of spread across and I’m assuming it depends on how the particular law firm owner has it structured.
Like are they just salaried? Are they taking distributions? Is there a K 1? Obviously that brings in your tax accountant, but it is important to know that when you say payroll. That doesn’t necessarily mean all of the income that the owner makes may not be coming out of that one bucket.
BROOKE: That’s right.
That’s why we talk about total owner compensation, because it comes from different [00:34:00] places. And that includes, you know, the car you may be running through the firm or that trip to Hawaii that You know, you attended the CLE for an hour and a half.
LAUREN: It was a business expense, yes.
BROOKE: Yeah, you know, that you took your entire family of 15 on.
You know, whatever. I get it.
LAUREN: No judgment.
BROOKE: None. At some point, everyone’s done it. And, and that’s fine. One of the things that we do pretty early on when we work with clients is we reorganize their chart of accounts. So that they can see what their total owner compensation is, because so often your total comp doesn’t show up on a paycheck, and it doesn’t really show up on your tax return.
And it’s really frustrating to be working so hard and not feel like you’re making much money. And when we reorganize it, and we kind of show you about your kind of sliding past the [00:35:00] IRS, sometimes you’re like, ooh, okay, maybe I’m not so poorly compensated. Yeah. Huh. And the after tax value of that would be, hmm.
Makes a difference. Yeah, maybe, maybe, maybe. I don’t have such a bad gig going.
Of those three buckets, where do y’all classify taxes that the business has to pay, like regardless of its structure? If it’s a pass through that the owner, it’s this, you know, sole proprietor or it’s an LLC, right? They’re going to have to pay taxes on the revenue that the business generates.
If it’s an S Corp, there’s going to be different kinds of taxes. Is that being lumped into the expenses? Bucket
that sits in profit. Oh, okay. Okay. So when we talk about profit, we’re talking about, let me get a little wonky here. EBITDA earnings before interest taxes and depreciation. Not something you see on a normal law firm’s P& L.
LAUREN: Right. If I don’t pay attention to taxes, [00:36:00] that’s either a real big hit come April, but it’s something that I’ve learned over the last few years that I make quarterly estimated taxes to the government and I have set up my accounting very similar to how y’all have done it, where there’s a percentage that goes to that and every quarter, I take that and pay the government so that I don’t all of a sudden think I have 20, 000 in the account.
And then the government goes, knock, knock, knock. We need, you know, 15 of that. And you’re like, Oh shoot. And now you’re in that cashflow issue because you weren’t expecting that.
BROOKE: And now you’re making bad decisions again, and my decisions are expensive. Yeah. You know, when my brother first made partner. When he came to work for my father, and we, we switched him from payroll to being paid as a partner, I was like, okay, here’s the deal.
I’m going to do this for you. And we had his, his partner’s draw separated so that a certain percentage automatically went [00:37:00] into a tax account so that he could just write that check. Because it is really hard if it goes into your checking account, it’s so hard not to spend it. Very few people have the self control not to spend it.
Mm hmm. I mean, it’s sitting there.
LAUREN: Right. And especially when, you know, life emergencies come up and things you didn’t expect and you really, you know, need those funds. But yeah, when the government comes a knocking, they, they don’t really need those excuses. So it’s important to, to actually calculate that and make sure that it’s put aside.
BROOKE: Yeah. Take it off the top. Don’t ever let the money… That you need to use to pay taxes ever hit your personal account. That’s smart. And, and don’t leave it sitting in your business account either, like it just needs to be siphoned off into a tax account.
JESS: I want to switch gears ever so slightly and [00:38:00] ask you a question about billing and collections.
Yes. So, and see if you’ve run into this and if you have any advice. It seems to me not just the average lawyer, but just the average person doesn’t love talking about money. Thank you. Um, it’s kind of an uncomfortable topic that could be for many reasons. It could be how someone was raised. It could be a money mindset.
It could be many things. But we oftentimes find that people don’t love that aspect of running a business. And so they might put it off if someone’s not paying them. And this might be one of the reasons why they’re not financially healthy. So I was just curious if you had any tips for attorneys who might feel that way.
BROOKE: Yeah, so I think the best thing to do about AR is not create it and AR is created in your sales call because that’s where you set expectations about how you’re going to be paid. So set the expectations with your fee [00:39:00] agreement that you are going to be paid on time. Every month. We do this with our clients by having a fee agreement with a credit card authorization form.
We’re going to send you a bill. 10 days later, we are going to charge your credit card. To keep you in compliance with the fee agreement, whether that is paying your bill, refilling your, your trust, your evergreen trust amount, whatever it is, we’re, we’re going to keep you compliant. That, that is a huge help.
The, the second thing is, if money is hard for you as the attorney to talk about, there are a lot of firms that have divorced the money from the legal side. Have your receptionist or your bookkeeper call and collect the money. That was something that I did when I was running my, my family’s firm. The attorneys didn’t talk to their [00:40:00] clients about their trust account balances.
They didn’t talk to them about billing issues. All of that came to the staff side. I didn’t think that the attorney had overcharged them for the amount of time they spent drafting something. When a client either hadn’t paid or their trust was running low, that’s a lot of what was going through the attorney’s head.
Well, if it hadn’t taken me three hours to draft that, if I had drafted it in two and a half, and if I hadn’t spent so much time doing this, then their trust balance wouldn’t be so low. As a non attorney, I don’t know that. I don’t care. And I think that three hours was totally fair, because I know you actually spent three and a half or four.
I don’t have that same head trash. So give it to me. Let me collect it. Let me talk to him. Some firms love that. Some firms don’t.
LAUREN: And I was going to say, you know, as a solo or small firm, if you don’t have the resources [00:41:00] to separate responsibilities like that, I think your first recommendation is across the board, but in particular for smaller firms is be proactive about it.
Don’t let yourself get to the point where you’re needing to collect, get it up front, whether that’s how your billing structure is, do it on a flat fee and collect it all up front. And then you won’t have to necessarily have those more uncomfortable conversations when a client hasn’t paid. It’s still going to be maybe uncomfortable if talking about money makes you uneasy when you have to talk about what the cost is going to be up front, but that’s slightly easier than Transcribed This was the cost and now they haven’t paid and now I’m in like a collection situation.
So just being proactive and trying to avoid that is really the best remedy.
BROOKE: And frankly, I think the first hire that most people make, and especially these days, is some kind of virtual assistant. And if you’re using, I’ll, I’ll use, uh, one [00:42:00] company as an example, uh, back office buddies, they answer phones.
That’s an answering service for law firms. They’re great. All their people are on shore. They’re amazing. And when you work with them, you also get X number of. Virtual assistant hours a month. So have your virtual assistant call and collect that money.
LAUREN: Yeah, especially if it’s a real, a real sore spot and just really difficult for an individual.
Like know what your challenges are and use the resources from the firm to address those first because those will only pay dividends kind of reinvesting back in your time and what you can spend your time on.
BROOKE: It’s just like hiring a bookkeeper to do your books. You can spend two hours a week doing it to the tune of 600 a week, 2, 400 a month, or you can hire someone for 600 to do it.
LAUREN: And we’ve got to really think about our businesses as businesses and [00:43:00] make those decisions using those numbers. And I think that’s why. This conversation is just so important because we don’t talk about numbers enough because yes, the idea in our profession is we don’t like math. We don’t like numbers.
We run away from it. But if we’re going to be law firm owners and business owners, we’ve got to face it head on and know what it is. And what would you say for someone who wants to be more. Financially in the know about the numbers of their business in a better financial position, have a healthy business in terms of numbers.
What can they start doing today to get themselves to that point? And are there any tech tools or resources that folks can implement that are easy, maybe really cost effective to help keep them organized? So as they’re putting all these numbers together, they really have a good sense of where their business is at.
BROOKE: I’ve got a whole list. I think the, the first one that is easiest is we [00:44:00] have what we call the profit finder and it does exactly what it says. It goes and it helps you find more profit in your business. And, you know, I said earlier that we run law firms on the rule of thirds. One third goes to payroll, one third goes to overhead, and one third goes to profit.
Now, those percentages change slightly depending upon what your revenue is and what some of your setup is. Go to my website, CathCap. com forward slash Profit Finder ADP, for a different practice, and, and you can access the, the Profit Finder for free, and it’ll tell you. Where you’re overspending, where you’re underspending.
What are some things that you can do about that? And then I would say there are a couple of books. One is mine. It’s called From Panic to Profit. It talks about those six numbers that we talked about today. [00:45:00] And the other one that I think is great at helping people instill discipline is Profit First. I will say I’m not a huge fan of the 14 trillion bank accounts he tells you to open.
LAUREN: But I feel you there. I use the proper first method. And that was my, my biggest challenge with it as well. I don’t actually do that. So if he’s ever listening, please don’t smite me, but the, the principles of it are on point.
BROOKE: Yeah. Well, I know. And I say that in Mike McAuliffe wrote a quote for my book. I’m like, Mike, I really love what you say, but we don’t need 14 accounts.
Um, so, but yeah, I mean, it’s a great way to get into discipline and to hold yourself accountable. I think those are two things that you can do that will help.
LAUREN: And I will say about profit first too, it is not. Confusing, overwhelming. It’s [00:46:00] a pretty simple system. Like he does, it can be made complicated if you do all the bank accounts.
But I think the principle behind that is to keep you organized. And it wasn’t something that I felt overwhelmed by. I’ve read some other finance and accounting resources that I’m like, is this English? Like I don’t, it’s so like beyond what I think the average. Business owner like myself needs. And I really loved about profit first.
And I’m sure about your book, which will be next to my reading list is it was accessible. Like it is not so in the weeds in this accounting language that you can’t get it. So if anyone is hesitant about that, I will say that the two of those are accessible.
BROOKE: Yeah. And you’ll find that my book is very much aligned with profit first.
And in the way we look at things, and it’s very aligned in that we use what I call kitchen table English. I mean, it’s normal words. I don’t say [00:47:00] accretive, and I don’t say this and that, like, it’s not worth it. I say, will it add value? That’s easy to understand. Is it good? Is it bad? And I think that’s, that’s part of why people say they like my book.
It’s easy to read. It’s easy to understand. They’re no big fancy words.
LAUREN: And it certainly makes the whole accounting and finance of a business process way more manageable and a lot less scary, which I think is what holds a lot of people back from digging in at all.
BROOKE: Well, here’s the thing. Attorneys aren’t dumb.
You guys could all figure this out. There is no reason why you can’t do this. You just haven’t gone through the same educational process. I’m smart enough to practice law. I can’t. Because I haven’t gone to law school and learned everything that y’all learned. I respect and admire your skill set. I don’t feel bad that I don’t have [00:48:00] your skill set.
There’s no reason why you should feel bad that you don’t have my skill set. That’s all it is. We have different skill sets. And our skill sets That our personalities and our skill sets fit the things we love to do. That’s a great point.
JESS: And I love how you have a little growth mindset in there as well.
I’m a big fan of that. Thank you so much for all this information you’ve shared. It’s been wonderful. One of the things we love to ask our guests at the very end is, How do you define success?
BROOKE: Oh, yeah. How do you define success? I think that is such a personal thing. I think that you define success Every individual defines success differently and you can define it.
I think most people think that it can be defined in terms of money. I think it also can be defined in terms of time. It can be [00:49:00] defined in terms of your reputation. It can be defined in so many ways. I’ve had people that we’ve worked with. I had one woman. What she wanted from her practice. Was to be able to go to her children’s swimming lessons on like Tuesday and Thursday mornings at 10 a. m. That’s how she defined success. I’m like, great. We need to help you build a practice where you can go to your children’s swim lessons 10 a. m. on Tuesdays and Thursdays. Great. That’s success. Perfect. Add another client who defined success as being able to help a very specific niche of women in their divorces.
To do that, she needed to be able to practice all across the country. Okay, great. So we needed to do two things. One, we needed to build [00:50:00] her main practice in such a way that she didn’t have to be there to run it on a daily basis because she was going to be traveling. And two, we had to build a practice that was profitable enough to fund the PR people that she was going to need to be able to build the reputation to build the national practice.
Because that was how she defined success, because she wanted to help these specific people. Great. You know, I worked with a, with another client, and I happen to be mentioning all women, but I mean, that just is what it is, who defined success. She called me one day and said, my mortgage isn’t going through like, okay, let me talk to your broker.
Got on the phone, walked her broker through her P& L, walked her through her tax return, just like explained everything to her. She got her, her mortgage and success was moving her family into, I swear it was like 1953 in that [00:51:00] subdivision. There were lacrosse nets and all the. front yards, there were children riding bikes, there were bands of boys running up and down the street in like groups, they were, it was hysterical, it was 1953, leave it to beaver was about to walk down the street, but that was success for her, it was in the right school district, and her children could run and play, and there was a neighborhood pool, and like it was everything that she wanted, so I think success is, is what it is to you, It’s very individual.
LAUREN: We couldn’t agree more. And that’s why we like having everyone sort of share theirs and others that they’ve seen because we get in the trap in the profession that it looks one certain way. And I think we’re hopefully showing folks that it can look all different kinds of ways. And it’s just what It is important to you.
So thank you so much for sharing those anecdotes. Those were all great. And for spending your time with us today, we cannot thank you enough. There were so many good nuggets in this and so many practical things. I hope that folks [00:52:00] will use to feel better about the finances of their business. If anyone wants to learn more about you or your firm, where’s a good place for them to connect with you.
BROOKE: I think my website is a great place. Cathcap. com C A T H C A P. com. If you want to chat with me, there’s a button there where you can book a call.
LAUREN: And we’ll link all of that in the show notes as well. Thank you so much, Brooke, for your time today. We really do appreciate it. Thanks, Brooke. Thank you.
We’re over here giving you a virtual high five because you just finished another episode of A Different Practice. For more from this episode, head over to adifferentpractice.com/podcast for our show notes. If you found this episode helpful, we’d love it if you’d share it with someone. Be sure to rate the show wherever you listen to podcasts and don’t forget to subscribe so you never miss an episode.
If you’re looking for even more practical tools to optimize your law practice for growth [00:53:00] and enjoyment. Sign up for our monthly newsletter at adifferentpractice.com/subscribe. We can’t wait to connect with you next time. Until then, keep building a different practice.
