Law Practice Management – How To Determine Your Fees
It’s never a bad time to take a look at how much you’re making and where your firm stands. At this early stage, it’s important for you to know your fees so that when the market changes and there are opportunities for more in-demand services, you can make those decisions.
If you want to find out how much value your law practice offers, calculate your firm's fees with this simple formula: Gross Revenue – Expenses = Fees (Price per Day).
The question isn’t how do you generate revenues but how do you pay your bills.
By calculating the amount of gross and net income over a period (quarterly, yearly or even more often) you can compare one year to another or even on an individual client basis. You can also use the formula to adjust your fees based on a new market or service change.
How To Calculate Your Fees
Assume that one year's worth of charges is recorded in Column A, and then divide each column by the total number of days in a year: Column A ÷ 365 = Column B Column B ÷ 365 = Column C Add columns C and D together (Column D).
Some people prefer to use actual year numbers (Column E) rather than 365 days; you might feel this is more accurate. This method is also a quick way to calculate a per-day fee for your services on an individual client basis (Column F).
Once you know how much revenue your law firm generates and how much you spend, you can determine your fees. When the gross revenue decreases over the years, there may be an increase in expenses such as rent or personnel. You may need to change your fees if your firm needs more money or less money.
Costs and Expenses
The following are common accounting expenses that can be deducted from gross revenue:
The following are common general law office expenses that can be deducted from gross revenue:
Note: Each of these will have varying costs for office space, computer equipment, lease fees, and more. Typically, you'll need to consult your accountant or attorney if you're unsure about any of the above expenses entering into your practice.
Revisions To Fees Chart
As you start to construct a chart like this, remember that not all professionals will charge the same fee for an identical service. They may charge more or less depending on the area they handle, specialties they possess, and so on.
Shampooers charge $20 an hour; attorneys handle hundreds of thousands of dollars in cases every year. A personal injury attorney may deal primarily with car accidents and brain injuries; a divorce lawyer may handle thousands of cases annually. The fees can be expected to vary greatly based on the nature of the services and the demand in your field.
Make sure that you're realistic and careful when putting together your fee chart. Don't lie about what you're doing – it's a crime (if you file false information with various taxation agencies) and it's unethical (if you know that your billing is incorrect).
How to Calculate Your Fees for Non-Billable Work
Hourly Rate x # of Hours = Hourly Fee You charge your client for the time you have worked on their case, but not necessarily for every minute you spend working on their issues. For example, if you charge a client $100 per hour, and spend 8 hours working on the legal issues associated with their case (or other work), then your hourly fee would be: $100 x 8 = $800. This means that your hourly fee is $800. Due to the nature of your legal work, you may spend 12 hours on a case and only bill for 2 hours. A client will not see $800 on their invoice for the two hours that you billed them for; instead, they will see your hourly fee of $800.
Billable Time You should also know how much time you spend actually working on a case. This will help determine your overhead costs and therefore your fees. For example, if you are charging $100 per hour and most cases take 10 hours to complete, then you have billable time of 10 x $100 = $1000. Therefore, your hourly fee is $1000.
All of these factors combined can greatly impact the fee that you and your client will pay for legal services.
The "Value" Of Your Practice, Part 2: How To Determine Your Billable Hours
You'll want to use a process similar to the one above so that you can see how many billable hours your practice generates. Using billable hours as opposed to gross revenue will give you a better idea of how much value your practice brings in compared to other firms in the area and other practices at the same level.
The formula is:
Gross Revenue x (# of Hours ←Input your total hours here) = Billable Hours
Next Step – Now that you have both a gross revenue and billable hour number, you can compare them side by side. If the hours that you spent on your work are substantially less than the gross revenue, then you should try to figure out why this is the case. Perhaps you are losing a lot of money to overhead and unproductive activities (such as making unnecessary phone calls)? Or perhaps your overhead is high? Of course, if your hours spent on a case equal or exceed your gross revenue, then it might indicate that there is room for improvement in terms of efficiency and productivity.
Conclusion
The formula above can be used over and over again. The only difference is that you'll want to keep track of your billable hours as opposed to your gross revenue. The purpose of this is to get an idea for how much work is available for you to do every month and compare that number with the total number of hours in a year.
This will help you figure out whether or not you have enough work to bill; if there's not enough work, then you may even consider slowing down and taking on new cases at a lower rate so that your billable hours are increased.