Your Law Firm Is Profitable. Can You Actually Afford to Hire Another Attorney?

By ProfitWise - a Visa Business Plans company

A law firm owner came to us with what seemed like a pretty straightforward decision.

The firm was profitable, everyone was busy, and the attorneys were starting to feel stretched. He had already interviewed someone he liked and was ready to make an offer.

Then he asked, almost as an afterthought, “We can afford another attorney, right?”

The firm was making money, so his assumption made sense. But adding an attorney isn’t simply a matter of comparing the new salary with last year’s profit.

For starters, the salary is only part of what that person will cost.

Once you add payroll taxes, benefits, malpractice insurance, bar dues, technology, legal research subscriptions, and whatever else the firm provides its attorneys, the actual cost starts looking different.

More importantly, the new attorney may not produce enough revenue to cover those costs right away.

That’s where hiring in a law firm gets interesting.

A new associate may spend the first few months learning the firm’s clients and procedures. Even an experienced attorney needs time to build a caseload. If the firm bills hourly, there’s also a delay between the attorney doing the work, the invoice going out, and the client eventually paying it.

Meanwhile, payroll starts with the first paycheck.

In this case, we looked at what would happen if the new attorney took several months longer than expected to become fully productive. The firm could still make the hire, but the owner would go into the decision knowing how much of a cushion he wanted to have available while that happened.

That kind of planning is especially important when a firm is hiring in anticipation of future work.

Maybe a large client has promised additional matters. Perhaps a new practice area is gaining momentum, or the partners simply know they’re turning away work because nobody has the capacity to handle it.

Those can all be good reasons to hire. Still, anticipated revenue and collected revenue are two very different things when payroll is due every two weeks.

At ProfitWise, we help business owners think through this kind of decision before they commit to a significant recurring expense. We can look at the firm’s current financial performance, what the new hire will actually cost, how quickly that person is expected to generate revenue, and what happens if reality takes a little longer than planned.

Sometimes the answer is reassuring. The firm has plenty of room to make the hire and probably should have done it months ago.

Other times, waiting isn’t necessarily the answer either. The numbers may suggest starting with contract help, improving collections, building a larger cash reserve, or simply giving the firm a few more months before bringing someone on full time.

Hiring another attorney can be one of the best investments a growing law firm makes. It can increase capacity, relieve pressure on existing attorneys, and create room for the firm to take on opportunities it currently has to turn away.

Just make sure the decision isn’t based only on last year's profit.

Your new attorney’s paycheck won’t wait to see how profitable this year turns out to be.

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