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How To Improve Firm Profitability
Let's begin with a short quiz. Two firms each have $20 million in revenues. One firm has 40 equity partners. Its cash-basis profit & loss statement shows a profit of $8 million, 40%. The other firm has 15 equity partners. Its cash-basis P&L shows a profit of $6 million, 30%. Which firm is the most profitable?
Answer: The second firm.
There is no trick here. Many lawyers measure their firm's profitability the way a company does ' as a percentage of sales. However, the correct way to measure the profitability of a law firm, whether it is a partnership or a professional corporation, is the net income per equity partner (NI/EP) (or shareholder). The first firm above has a NI/EP of $200,000 ' $8 million divided by 40 partners. The second firm has a NI/EP of $400,000 ' $6 million divided by 15 partners. Therefore, when analyzed correctly, the second firm is far more profitable and makes far better use of its resources.
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