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Melissa Shanahan

#148: Accurately Calculate Average Revenue

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At our recent strategic planning retreat, we took a deep dive into average revenue per matter, or matter type. Now, there is a common equation for calculating your average revenue: total revenue divided by number of closed cases. However, to get the most accurate reading, you might need to consider how you’re closing your cases at your firm.

The procedure you have for closing cases really does matter. It’s impossible to get reliable data if one huge metric like closed cases isn’t adding up. So, in this episode, Melissa shows you how to come up with a company-wide procedure for closing files, so you can stay on top of your data and manage your cases efficiently.

Tune in this week to get clear on a proper procedure for dealing with your files. Melissa shares why having average revenue data is so important for your firm and how you strategize for the future, and she is also giving you some amazing resources to make this process much more manageable.

Show Notes:

What You’ll Discover:

Why staying on top of your data and closing files when they should be closed is so important.

The staggering amount of law firm owners who aren’t keeping their closed-case information up to date.

How to come up with a file-closing procedure that will help you come up with accurate calculations for your firm.

Featured on the Show:

Create space, mindset, and concrete plans for growth. Start here: Velocity Work Monday Map.

Clio: Legal Software

Streamlined Legal

Lawmatics

Ep #15: Two Important Numbers in Strategic Planning + How to Calculate Them

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Full Episode Transcript:

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I’m Melissa Shanahan, and this is the Velocity Work podcast episode number 148.

This podcast is for attorneys who are running their own firms. We explore tactics, tools, and stories related to pushing tasks and simply lawyering well and into building a successful firm. Working in your firm and working on your business are two very different things. This podcast focuses on the latter.

Hey, everyone. Welcome to this week’s episode. I just got done leading a strategic planning retreat for a small group of attorneys. I am running a beta program this year called Circle. It’s about six attorneys in there all working towards freedom for themselves with their firms. And it’s going really well. Well, today was our strategic planning retreat. And one thing that came up today is something that has come up many, many, many times in the past when I have worked with law firm owners.

I’m going to give you a little bit of insight as to why this came up and then we’ll address it. In the workbooks that they have they are prompted to provide or calculate their average revenue per matter or per case. And for the firm, yes, as a whole but then also by matter type or by case type. And only the ones that they really want to look at, the heavy hitters or the ones that they want to grow. There’s going to be certain matter types that you’re like, “Yeah, I want to know that. What is the average revenue on that?” So that’s what we do. We look at average revenues.

And we talk about calculation of those. Now, there is a very common equation out in the world that is offered to law firm owners to calculate your average revenue per matter. And you’ll see people recommend this where it is your revenue in a certain date range divided by the number of new cases or new matters that came through the door in that same date range. Well, okay, maybe, but that’s not the most accurate way of getting it. I do think it’s an interesting exercise to do that math and see how it compares with the actual average revenue per matter, or file, or case.

How I instruct people to do this is, it depends on your fee structure. So, if you’re flat fee, you could use the equation that’s typically thrown out there which is let’s say you’re going to do a 12-month period. So, the last 12 months, will take the firm revenue, divided by the number of cases or matters that came through the door. But if you have payment plans then it’s still going to be a little bit wonky. So, you really have to look at the closed files and that’s it to determine the average revenue because it’s not all going to be collected yet for every case that walked through the door.

And so, it still may be very, very close. So, if you take, even if you have people on payment plans a lot, that’s mostly what you do, sometimes immigration firms… There’s a lot of immigration firms that do this. And that’s fine but you have to know that that’s not totally accurate. You can’t just take the firm revenue for 12 months divided by the number of new cases in 12 months and rely solely on that data. I do think it’s a good number to calculate because then you can compare it to the actual closed cases. And that’s what I’m going to talk about next.

If you are contingency fee you take the closed case revenue divided by the number of closed cases in the 12-month period. So, all the revenue that came from the closed cases divided by the number of closed cases. If you are hourly you take the closed case revenue divided by closed cases, same thing. You have to look at the closed matter revenue.

Now, the best way to do this is if you’re flat fee and people pay upfront. This is so easy because then you really can just take the amount of revenue in 12 months divided by the number of new cases in 12 months and that’s going to be your number. That is the revenue because people are paying upfront as they come in. That’s great. But that’s the only way that you can really use that equation and it be 100% accurate.

So okay, knowing that, so I just said all that. And this is not the point of this podcast episode. I am just trying to give you all the data so that you can see why there can be an issue for people. Most of the time people can’t get the information that they need in order to calculate accurately using the closed cases because they don’t close the files properly in their practice management software.

This happens a lot with Clio. It happens a lot across the board but it seems with Clio this pops up more because people just, they don’t have a procedure or a process for closing out matters or cases in Clio. And you can do that. But everybody in the firm has to be on the same page and there are certain responsibilities going to be assigned to certain people that when the matter is wrapped, meaning all the revenue is in, everything is done, there should be a procedure for closing it out in your software.

And I recommend doing this weekly, maybe monthly depending on your volume of cases. I mean I guess depending on the volume maybe even do it more frequently than weekly but this has to be done. This is good file management. It’s healthy file management inside of your firm. And that allows you to run reports that you need to run in order to get the data to calculate things accurately.

So, if you don’t close files out you can’t run a report for the number of closed cases in a year because you don’t have it. You can’t tell, they aren’t closed in the software. And which also means you can’t run a report for the revenue associated with closed cases because nothing was closed officially inside of the practice management software. So, this podcast is all about having a file closing procedure for your firm, or a matter closing procedure, or a case closing procedure for your firm. What does that look like?

What are all the things that you want to have done when you’re closing up a file? There’s certainly some things that have to be done inside the software but maybe it even goes beyond that. Maybe a part of closing a file is sending requests to rate you or review, and get a Google review. Maybe it’s to send a gift because everything is totally done. So maybe that’s a part of the closing the file procedure, you send a gift to your client depending on your practice area.

There are going to be things that are specific to your firm and specific to how you want to run things and they should be a part of closing the file. But there’s going to be things that are specific to your firm. And there’s going to be things that just should be done in your software in order to stay on top of and manage the cases and matters correctly in your practice management software. Once you can do this and you start doing this then you set yourself up to be able to pull the right reports that will allow you to calculate your average revenue with ease.

And what I’m finding is that so many people, I mean a huge chunk of law firm owners that I first come into contact with, they haven’t been doing this well. And so, they can’t get the accurate data. They can’t calculate an accurate average revenue per matter or case because they don’t have the closed case information, they can’t pull it. So, what they start doing is, in the meantime we will use the generic equation that works only if you’re flat fee and paid upfront which is in 12 months or whatever date range you’re going to be using.

The revenue that came through the door divided by the number of new cases and that is what you go on. And that is the average revenue. That’s the number that you use in calculations when you’re projecting, and setting goals, and determining the number of new cases that need to come in. I have done a podcast in the past on average revenue. So, if you want to learn more about how we use average revenue and how we think about average revenue, I would definitely go back. We’ll put that in the show notes. But that’s a different topic.

Just now is how you get it. How do you get it? How do you make sure you have the right information? So initially they will use the generic equation that I just shared with you. And they will begin having healthy file closing procedures instituted into their practice. They decide, what is the checklist and who is going to do it.

And once they start doing that, it takes a while to get a good enough data sample, enough months under their belt of data to be able to pull the reports and have a look at the revenue that’s come in from the closed cases. And to be able to determine the number of closed cases in that given time period. So, once you get three months that gives you a bit of a snapshot. It’s not a great data sample but it’s something. And you can compare that. Does that line up with the generic equation that you used, is it close? Are the two numbers close that you get?

And then as time goes on it’s more reliable, and more reliable, and more reliable. And eventually that is what you use. So, I wanted to make sure to do this because though it seems such a tiny little topic and maybe not podcast worthy. It is podcast worthy because I meet so many people who can’t do their calculations. And I mean I am not all about guessing. So, we do use an equation for them when we’re projecting in order to get the average revenues that we can set goals.

But there is a better way. And it’s unnecessary to not have the right way. We just have to get things in place internally. The other thing I’ll say in the conversation today we had, we were talking about this and how to close out files properly. There is a couple of other things. One is that most people don’t have Clio customized well enough. There’s too many general matter types and case types in Clio for the average firm. The average firm has 10 matter types, maybe they have two practice areas but they have matter types within each practice area.

And you want to be able to set up Clio so that it’s very customized and you know every case that’s going in, what practice area it’s in and what matter type. It needs to be categorized. And I’m not a Clio expert. My friends over at streamlined.legal are, Melanie Leonard and her team. So, if you would like help being able to customize and you’re not sure where to turn, they’re probably a really great resource for this.

But you have to set this up so it’s customized to you so that you can run really great reports when it’s time for you to analyze your business, and evaluate, and be able to pull numbers that you want to see. Otherwise, you end up doing a lot by hand. And it takes a lot longer. It’s more arduous and people won’t do it unless I’m sitting in a meeting with them and facilitating it. That helps, carving out the space. And I will pin you down for that number. I will help you do the math. I will be all over it.

But we aren’t going to plan without data and the best data that you can get your hands on. So set Clio up for your firm. Truly, truly it makes such a difference for you to be able to be a great business owner. Get your practice area set up. Get your matter type set up. And have a good, not just closing, actually they made the argument today, a good file opening procedure and a file closing procedure, or matter opening procedure or case matter closing procedure. So, make sure you have those things in place.

And then the other piece I want to share with you just to think through, many of the people I was talking to, or the majority of the six I was talking to today use Lawmatics. Well, Lawmatics is another spot where you can also make sure that things are closed out properly in Lawmatics. And assign an actual revenue or an actual value to that matter when it was closed and pull really great reports from that as well.

So, we had a really good discussion today. And it helped one another sort of find their groove. And some people had certain pieces figured out. Some people had done other things. But seeing them work together and talk together, and me along with them, but me being a bit of a voice of, “You’ve got to get these numbers. How are you going to get these numbers in your scenario, in your setup.” And so, they were helping one another kind of figure that out.

So, I just want to encourage you that average revenue is you have to know that number. You should know that number. It’s so important. Knowing your average revenue, yes, per matter for the firm, or per case for the firm. But also, per practice area and then even more so, per matter type that you care about. Maybe there is another category, you don’t necessarily care about that. But there are certain ones that have more weight in your firm. That’s what I want you to stay on top of. That’s what I want you to track.

It is a very important number to know and it’s not easy to get if you don’t have great file management, just a healthy way of managing your files and opening them properly, closing them properly then it makes it tough. And if you don’t have your practice management software set up so that you can pull reports on practice areas, you can pull reports on matter types, that matter to you. That’s all important.

So yeah, this whole podcast is set up to make sure that you are awake to the things that you need to be adjusting so that you can be a better owner. And the more you do that the more leverage you give yourself, and the more visibility you have into the numbers and to facts and not feelings. And the better planning you can do, the more strategic you can get with what you’re going to put your time, and energy, and effort behind. And the more on point you are with your goals that you’re setting, that matters. This number matters.

If you want to learn more about why it matters and you want to start getting used to how to use your average revenue and how to get it, how to calculate it, how to use it to your advantage. Then come and join us at Velocity Work, master group doors are going to open pretty soon so get on the waitlist. You can go to velocitywork.com/join. We’d love to have you in the next round.

Alright everybody, have a wonderful, wonderful week and get your file system, your practice management system and how you manage your files, and cases, and matters inside of your software. Get it in order. Get your house in order so that you can be a better owner. Alright everybody, have a wonderful week. Talk to you soon. Bye.

Hey, you may not know this, but there's a free guide for a process that I teach called Monday Map, Friday Wrap. If you go to velocitywork.com, it's all yours. It's about how to plan your time and honor your plans, so that week over week, more work that moves the needle is getting done in less time. Go to velocitywork.com to get your free copy.

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