Profit Analysis – It’s easier than you think

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Firms that have ventured down the path of profitability analysis understand the complexities of the journey. The BIGfish Profit Module adheres to best practices and design concepts to deliver a top-notch reporting experience.

Profit analysis is not a one-size-fits-all proposition. A firm’s makeup influences the variables that come into play during the configuration of the profit module. Does the firm have multiple offices? How should the system allocate shared overhead? Does the firm want to report on profit from a cash or accrual basis?

The cost of providing a service versus the worked, billed, or collected value is the simplest definition of profit. Law firms measure realization – the percent of worked value versus billings or payments, but if we assign a cost basis, we create a true profit model.

The simplest way to assign a cost basis is to create an annual rate for a unit of production. In law firms, the unit of production is an hour of billable work. We commonly create a base rate and a loaded rate. To calculate the base rate, look back at the prior year and divide the number of billable hours generated by an attorney into the gross compensation. To arrive at the loaded rate, add the attorney’s share of overhead to the gross compensation and divide by the number of billable hours. With these two rates, we can look at work performed (i.e., entered or billed values from the time and billing system) to determine profit. Since the core of this analysis is time entries, aggregations over a client, attorney, office, law type, etc. become possible.

Annualized rates paint incomplete pictures of profit because they do not capture fluctuations in attorney costs over the course of the year. Computing attorney costs by accounting period and taking into account write-offs and adjustments give a more robust profit number. The BIGfish Profit Module provides tools for firms to capture data from external systems, to key periodic adjustments, and to scour the GL to create formula-based costs (overhead distribution, for example).

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