Isn’t it quite obvious that regardless of the sector a firm belongs to, the profitability factor is quite universal?

No matter the size or scope of the business or the industry in which it operates, a company’s objective is always to make a profit.

Profitability, in general, is defined as bringing in more revenue than you spend on your expenses.

Mathematically,

Profitability = (Total Revenue – Total expense)/ Total Revenue * 100
Or
Profitability = Billing amount – Resource Cost

 

Your practice is profitable if you earn enough capital to afford all of your expenditures plus a little extra. The appropriate examination of earnings, however, entails much more. A single dollar figure does not reveal where your profit comes from or what you can do to boost it.

Let’s go ahead and understand one of the simplest ways “How Law Firms Should Calculate Their Profitability?”

Suppose engagement details of any matter are as below.

Matter Title	Drafting of SHA
Client Name	Legalxgen
Proposed Cost	Rs. 150,000.00

Suppose to deliver above work details of the team members involved, their rates, time spent etc. are as below:

Name	Designation	Hourly Rate (Rs.)	Time Spent (hours)	Cost
Will Smith	Senior Associate	10,000.00	2	20,000.00
Peter Parker	Associate	8,000.00	7	56,000.00
Gordon D’Costa	Associate	5,000.00	11	55,000.00
TOTAL			20	131,000.00

So, what’s the profit firm makes for delivering the matter ‘Drafting of SHA?

Hmm! Now it’s the time to brush up the mathematics knowledge.

We know, Profit = Proposed Cost – Total Expenses

So, Profit = 150,000.00 – 131,000.00 = 19,000.00

And Profitability = (Profit / Proposed Cost) * 100
= 100 * (19,000.00/150,000.00)

Thus, Profitability = 12.67%

If we do this exercise for all the matters, we’re able to derive the profitability in multiple ways, Client Wise, Sector Wise, Time Period Wise, etc.

No No! don’t worry! the profitability of your firm is not going to be as low as the above. If you set the required parameters accordingly you can make a profit as high as 30-40% or above.

Keep an eye out for the next exciting blog. Until then, have a look at LegalxGen’s service features to see how they might help your business become more profitable.

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