Why Do I Have To Focus On Capital If My Firm Isn't in Trouble?
The short answer is that you don't - but you should. Unlike the largest firms with hefty operations and overhead, small and mid-sized firms have a bit more flexibility. Good lawyers can focus on doing good work and attracting clients over time. At that pace, a firm could potentially self-fund its own operations.
The wrinkle, of course, is that the cost of generating clients and running a firm are be coming more expensive each year, which in turn has made margins tighter. Marketing and technology are becoming more of a must-have than ever before, as is made clear by the dizzying displays at any lawyer networking event. Legal tech companies have grown exponentially in the last decade, making it hard for many practitioners to keep up. Meanwhile, the profit gaps between small/mid-sized and larger firms have grown exponentially since the Great Recession.
But even putting that aside, while a small to mid-sized firm can potentially self-fund its working capital needs for an extended period of time, that model has very tightly defined limits in terms of upward trajectory and profitability. There is simply a finite set of time and hours that an attorney can spend on a case. So even if you employed a killer marketing campaign, for instance, there is a limit to how many cases your firm can take on at any given time.
Increased Profitability Requires Access to Resources
Whether you're looking for firm growth or increased profitability, the only proven way to break through that finite barrier is by leveraging firm resources. The most effi cient law firm leveraging comes through software and staff, both of which are aimed at increasing efficiencies. Software streamlines case management and internal ope rations, with clear processes and tracking allowing for far more effective practice ma nagement. Adding headcount allows you to push more work down to the cheapest cost resource. Lower-level, time-consuming tasks (which otherwise might be written off) can be delegated to associates, contract attorneys, paralegals, or administrators at far lower cost structures. Bigger firms are laser-focused on leveraging, which is hi ghlighted again and again as a key differentiation factor for firms in driving growth and profits. On a more human level, the approach can pay off dividends by freeing up lawyers to focus on more meaningful work.
Smart Capital Make a Huge Difference
The problem is that all of these resources require greater capital, which is extremely difficult to achieve through self-funding. The quandary is even more difficult for firms with significant contingency operations, which often operate in feast or famine mode. But the reality is that it takes money to make money. Investment in these sorts of resources accelerates growth exponentially. That's exactly what we mean when we talk about smart capital. Not only does it free you up to focus on the key tasks, smart capital can significantly increase your firm's bottom line.
What Other Reasons Are There to Avoid Self-Funding
In addition to breaking through the resource barriers, there are a large number of other benefits to using smart capital versus self-funding. Self-funding expenses ulti mately hurts a firm because it ties up capital that could otherwise be building the business. Take the scenario of self-funded case costs, which can account for a quarter of a law firm's annual expenditures. Self-funded costs can be tied up for a lengthy period of time, especially in cases with long-tails on recovery. That has an even bigger impact in periods of high inflation, such as now, when you're losing significant amounts annually through inflation alone. The longer those expenses sit out there, the greater the losses compound.
And that's assuming you recover in full. In the worst-case scenario, it's a total loss of funds. Those funds could have been put to use growing your business through marketing, softwa re, and additional resources, all of which amplify the bottom line rather than just serving as a cost item.
There are a number of other financial reasons to avoid self-funding your firm. Most signifi cantly, case costs and expenses are not deductible, which means you ultimately are cove ring the cost through after-tax dollars, only further reducing profits. This means that law firm partners pay taxes on money they aren't able to access and which may ultimately be written off. It's essentially providing an interest-free loan to your clients, which may or may not be paid off. There are other tax benefits as well, which we encourage you to explore. If you switch from self-funding costs, you can switch your focus to maximizing deductions and increasing retained earnings - all of which again lead to a healthier bottom line.
How Do I Find the Right Balance?
The problem, of course, is that you don't want to increase leverage too much or too quickly or you fall into the trap of over-leveraging resources. That's just as quick of a path to overburdening a firm. Often firms are focused on maximizing fees without considering overhead and accrual rates. That puts them in an unsustainable position over time, where they continuously need infusions of capital to sustain them. The sweet spot is finding right-sized resources and capital. This is where Bridgehead fits in. We approach every funding with the mindset of whether our capital can be used in a way that helps build your business. It's important to us at Bridgehead that our funding serves to help the firm over time, rather than serving as an anchor to impede profitability. We don't micromanage our capital and there are no strings attached. You are free to invest in your business as you see fit. But our foremost goal is to serve as a long-term relationship partner. We offer competitive and transparent rates, coupled with a view towards helping you better grow your business.
Contact us today to find out how we can partner to help your firm succeed.
Many states allow attorneys to include interest on borrowing costs in their recovery of fees and costs. Bridgehead cannot offer a legal opinion as to the validity in any particular state. But this can be an added benefit for many attorneys looking to offset case expenses, rather than absor bing them through their own after-tax dollars.