By Steve Fretzin & John Scott
Proactive Financial Management For Prosperity
As I sat down with John Scott, Chief Virtual Financial Officer at Summit Virtual CFO by Anders, I knew we were in for an insightful conversation about a crucial aspect of running a law firm—understanding your financial metrics. Law firms, like any other business, thrive on the numbers. But too often, lawyers, who excel at their craft, overlook the critical role that managing financial data plays in sustaining and growing their practice. I’ve seen this countless times with the clients I work with—brilliant legal minds who struggle with the business side. That’s why I was eager to dive into the nitty-gritty of law firm financials with John, who brings years of experience helping law firms run their businesses with precision.
John’s key message was simple: lawyers often believe that doing good legal work will naturally lead to business growth. While this might occasionally hold true, relying solely on this approach is risky. John emphasized that “you can’t manage what you aren’t measuring,” meaning that without tracking critical financial data, a law firm will eventually hit a roadblock. One of the most important tools John recommends is dynamic forecasting. This practice involves using real-time financial data to predict cash flow over several months, helping law firm owners proactively avoid cash shortfalls. Through dynamic forecasting, firms can see ahead, understand where the financial gaps might be, and adjust their operations accordingly, whether by ramping up marketing efforts or focusing on higher-value clients.
John’s insight on the importance of setting realistic growth goals resonated with me. When lawyers aim to grow their practice, the first question should be whether the firm has the capacity to support that growth. Simply aiming for a 20% increase in revenue sounds great, but if the team is already stretched too thin, that goal becomes unachievable. By analyzing workload, billable hours, and the firm’s operational capacity, law firms can set goals that are ambitious yet realistic.
In our discussion, John stressed that law firms need to pay attention to the financial metrics that matter most. These include cash flow, the firm’s production rates, financial accuracy, and its pipeline of incoming work. Cash flow is critical because it determines whether the firm can cover its expenses—such as rent, salaries, and owner distributions—over the next few months. Production refers to how well attorneys are utilizing their time. If a firm’s realization rate is unusually high, for instance, that may indicate that billing rates are too low, signaling a need for adjustment. Accurate financials, regularly updated and scrutinized, give firms a clearer picture of their overall health. Lastly, the pipeline metric reveals how much work the firm has in progress and whether its future workload can sustain the desired growth.
Another key takeaway from John was the importance of assessing and managing a law firm’s client base. Too often, firms spread themselves thin by holding on to clients that are not profitable or, even worse, overly demanding and difficult to work with. As John explained, law firms should regularly evaluate their clients and categorize them from top-tier, or “A” clients, down to those that may be less profitable or draining firm resources. This practice allows firms to focus on high-value clients and refer out or phase out lower-value or difficult ones. By doing so, firms free up capacity to take on better-quality work that drives higher revenue.
We also touched on the need for better billing practices. Many law firms experience cash flow problems simply because they aren’t billing consistently or on time. John highlighted what he calls billing hygiene, which involves creating a disciplined routine for sending out invoices and following up on unpaid bills. Delaying billing means delaying cash flow, and in the legal industry, it’s not uncommon for months to pass before a bill goes out, making it harder to collect. John advised law firms to send out bills more frequently, ideally twice a month, and to train their team to input their billable hours regularly. This shortens the cash cycle, turning completed work into income faster.
One of the most valuable pieces of advice John shared was about the importance of raising rates regularly. Lawyers often hesitate to increase their fees, worrying about losing clients, but waiting too long between rate hikes can backfire. Incremental increases year after year are easier for clients to digest and help firms keep pace with rising costs and inflation. John also stressed that when lawyers consistently find clients accepting their rates without pushback, it may be a sign that they’re charging too little. Raising rates for new clients, especially when entering into new engagements, is another way to ensure that the firm’s work is valued appropriately.
John’s overarching message was clear: law firms need to make data-driven decisions if they want to thrive. Financial management cannot be an afterthought, nor can it be left in the hands of a bookkeeper handling everything on the side. Firms need dedicated financial experts who can provide timely, accurate data and insights that enable lawyers to make informed decisions. Whether it’s forecasting cash flow, setting appropriate rates, or analyzing client profitability, paying attention to these metrics can make all the difference between a struggling practice and a thriving one.
Ultimately, our discussion reaffirmed the idea that running a law firm isn’t just about being a great lawyer—it’s about being a smart business owner. Delegating financial management to professionals, staying on top of key metrics, and making proactive adjustments are essential steps for any law firm that wants to grow, stay profitable, and succeed long-term
Get to know more about Jhon HERE.
For more information about taking your law practice to the next level, please email me directly at [email protected].
Steve Fretzin, an expert at legal business development, is the author of four books regarding the topic and is the host of the Be That Lawyer podcast. He has helped hundreds of attorneys across the world dramatically grow their book of business while living a well-balanced life. He can be reached at [email protected].