TRP 290: [Legal] Financial Management and Strategies for Independent Law firms with Ryan Kimler

[00:00:10] You're listening to The Rainmaking Podcast, hosted by high-stakes headhunter, author, and professional speaker, Scott Love. You're listening to The Rainmaking Podcast, and my name is Scott Love. Thanks for joining me on the show. Today is part of our Legal Specific series. Every Thursday, it is General BD and sometimes Tuesday. It's legal specific for those that work in the legal industry.

[00:00:38] Our guest today is Ryan Kimler, and our topic is Financial Management and Strategies for Independent Law Firms. Ryan is the founder of NetProfit CFO. He's the host of the NetProfit Podcast and also an international bestselling author. Through his firm, Ryan and his team specialize in helping law firm owners take control of their finances and drive sustainable, profitable growth.

[00:01:00] I've put all of Ryan's contact info on the show notes, even resources that if you're in law firm management, you need to check this out, especially check out his YouTube channel. There's all these great content ideas that he's put together absolutely free. This podcast is sponsored by SurePoint Legal Insights, formerly known as Leopard Solutions, turning legal intelligence into opportunity, and also by The Rainmaking Magazine.

[00:01:25] Don't lose business to the competition. Read this publication and keep business development top of mind. Visit therainmakingmagazine.com today to chart your course to greater rainmaking success. Thanks for listening, and I hope you get some great ideas from my conversation with Ryan today. Hey, this is Scott Love with The Rainmaking Podcast. Our guest today is Ryan Kimler, and we're talking about financial management and strategies for independent law firms.

[00:01:53] Ryan, thanks for joining me on the show. Yes, thank you so much for having me, and I'm excited to dive in today. Me too, and I'm excited to hear how you can help our listeners out, especially those that might be small firm founders, people that have started something recently, people that want to start something. But let me kind of start with a general sense of the biggest challenges you see independent firm owners have with managing their finances. What would you say are kind of the main areas that are points of concern in how they manage their finances?

[00:02:22] Yeah, so I would say number one is definitely just getting the right team in place. That can be a really big challenge, getting the right professionals around you and having additional help with managing the finances. Because as your listeners know, right, they're an expert at the law. They're an expert at being a lawyer and running a business, and accounting is not one of those things.

[00:02:47] So just getting the right team in place and getting the help that they need is usually the first biggest challenge. And what does that look like? What does that team makeup look like that you've seen in most small to medium-sized firms? Yep, love it. So usually four team members there. First one is a bookkeeper. I won't spend too much time there. I'm sure your audience is very familiar. Their job is really to track all of the transactions that happen in your firm.

[00:03:15] Money coming in, money going out. And really, that will put together kind of draft financial statements for your business, so to speak. The main financial statements being the income statement, balance sheet, and statement of cash flows. And then part two or position two would really be an accountant most likely to do your taxes and keep you compliant, keep your business compliant.

[00:03:38] They're going to take the work that the bookkeeper does and really take it and finalize it so that it can be submitted, the IRS and things. Position three would be a part-time CFO or fractional CFO, and that's really where my firm focuses.

[00:03:57] Their job is to come in and take the numbers that the bookkeeper produces and really to take it to the next level, to take things forward, forecast into the future, and really help you make the business more efficient. It doesn't just mean just cutting costs. It means making the business more efficient so that there's more profits and so that the business is growing. And then the fourth position would be someone to help the owner or partners with retirement.

[00:04:25] I like to say a retirement advisor does not necessarily have to be a financial planner. I say that the guideline and rule of thumb here is someone that you can really trust that is going to help you invest and retire on your terms. Good, good. Let me kind of dig into some of these. Let's talk about the bookkeeper. Yeah. This is the person that's really closest to the management of the money or at least the details and the data. You mentioned different statements.

[00:04:54] This might be an elementary question, but what are those statements that the bookkeeper should be generating each month or each quarter for the firm founder or the firm owner? Yep. Income statement and balance sheet for sure. And then statement of cash flows if they can. A lot of times with bookkeepers, they won't issue a statement of cash flows. Usually, that's not their expertise. But an income statement or profit and loss, those two are the same.

[00:05:23] Two different names, but same document. And then your balance sheet are the two that you should get on at least a monthly basis and you should look at and review on a monthly basis. Got it. And as they're looking at these, the income statement and the balance sheet, statement of cash flows. And you also mentioned income statement is also called the P&L. Yep.

[00:05:45] And then looking at the balance sheet, what is it that this firm founder, somebody that's really, really good at labor and employment law or corporate M&A, but they're not good at accounting. What should those people keep top of mind and really look at when they're looking at these sheets, at this data? Yep. So on your income statement, that's really going to show you efficiency of your business. Has all your sales in, has all your expenses out. And when you get down at the bottom, you get down to net profits.

[00:06:14] Profits of the business, this could also be net income. That is the number that you're going to pay taxes on. And usually, you know, in the U.S., the taxes are your responsibility personally. So if you have $100,000 in profits, that's going to be $100,000 of income for you as the owner that you've got to pay taxes on. But I think it's really important, you know, get with your bookkeeper and have them help you group the expenses into a few buckets. I like to see payroll, marketing, and overhead.

[00:06:44] Three buckets. Keep it pretty simple. You know what you're paying your people. You know what labor is costing you. Marketing. You know what you're marketing and advertising dollars, what you're spending there. And then obviously, overhead is everything to run a brick and mortar. Insurance. Office rent. Those are just a couple of things off the top of my head. Computers and softwares. IT. All those kind of things would go into. Overhead. Again, keep it pretty simple.

[00:07:11] But I think if you can keep a good handle on what's my revenue, what's my payroll expense, what's my marketing expense, what's my overhead, what's my net income? Your bookkeeper should be able to get it down to five numbers for you. Okay, good. And that should really help you summarize, see from a very high level. You make it sound so easy, Ryan. You know, you make it sound so easy. I do try to make it easy for the clients and everybody that I work with.

[00:07:38] I try to simplify things and just make it as easy and straightforward as possible. And then I'll give you two things to watch on the balance sheet. It's really important. Actually, three things. So on the balance sheet, you will have your bank balances. Cash. Okay, you're probably going to know what that is. You probably log in and look at your bank account. That's fine. Accounts receivable, which are the clients that owe you money, are also going to be on your balance sheet. So as a lawyer, you have done the work. You have billed the clients. They have their invoice.

[00:08:07] And they need to pay you. Keep an eye on that. Obviously, you don't want that balance getting too high. Second thing I would say is your debts. You're going to find that in the liabilities section. That is what you owe to other entities. It could be credit cards, lines of credit, loans, pandemic loans, SBA loans, things like that. If you've acquired a firm or something like that. So your debts, really, really key to keep an eye on.

[00:08:36] And how much are the balances? How much are you paying down on a regular basis? Again, if you're looking at this monthly, you can look at, oh, well, last month, my loan balance was $10,000. This month, it's $9,000, right? I mean, obviously, it's not going to be that easy that round, but you can see it coming down, right? And then the third thing is your equity section. And that's where your owner's distributions are going to be. So that's money that you have paid out to yourself in distributions above and beyond your salary.

[00:09:06] Definitely a good idea to keep an eye on that. And I would highly recommend reviewing the owner's distributions account. And the reason for that is if your bookkeeper, let's say they see a transaction that they believe is personal expense. And let's just say you went on to StubHub and bought tickets for a concert. They might think, oh, well, that's the personal expense of the owner. They put it in owner's distributions.

[00:09:35] That comes out as personal income to you and something that you would pay taxes on. When that transaction could be, maybe I bought a gift for a client, right? And that's kind of an advertising. And instead of being personal income to you, that actually gets expensed, which brings down your taxes on your net income. So you kind of can get hit both ways there if things are miscategorized.

[00:10:02] And so I would highly, highly recommend keep an eye on your distributions and what you're going to have to pay there for taxes. And also make sure that the things that are in there are in the right place. That's great. Such a simple formula that you shared with us. And where are the biggest pitfalls that you've seen that firm founders have when they're looking at these numbers? You mentioned all the different things you talked about, the balance sheet, equity section, the group expense, payroll, marketing overhead. Where are the biggest pitfalls that owners fail in reviewing this data?

[00:10:33] Yeah. So I think it's really good to not just look at the statements. And then, unfortunately, you do have to do a little bit of math. I know maybe not the favorite subject of lawyers. I know you went to law school because you were promised no math. But I highly recommend look at your expenses on a percentage basis.

[00:10:52] So if you brought in, let's just say, $100,000 in sales for the month and your payroll is $40,000 for the month, your expenses or your percentage there is 40%, right? Really look at those percentages and keep a trend on those. This might be something that your bookkeeper can help you with as well. But really, again, look at those percentages. Look at the trends.

[00:11:17] Some of the biggest pitfalls are just sometimes compensation plans and bonus plans can stress a firm out if they're not set up properly. Being priced too low can definitely stress the firm out. And just not picking up on trends when you're reviewing your numbers is really one of the biggest pitfalls because they can tell you and give you great insights into your business. Well, I think that kind of ties in with your area of expertise.

[00:11:45] You talk about a part-time CFO or fractional CFO. They're looking at what the firm is focusing on. They're kind of looking at the future, like you said, like forecasting. Yep. What can you share with us about some surprising revelations you've seen and recommendations you've made by looking at the firm's data in terms of its finances over the years? What are some of the most significant realizations that you've seen and suggestions you've made for your clients, Ryan?

[00:12:15] For sure. Yes. By keeping a trend on that payroll number and that payroll percentage, I can see over time, did the hires that we just made, are they contributing to making the business better and more efficient? Right? Because if they're not, the payroll percentage is going to get higher. If you're getting a 3x return on everybody at the firm, your payroll percent will be 33. If you're only getting a 2x, it goes up to 50. Right?

[00:12:43] So looking at those kind of things, and the fame is true with return on marketing. So if I see marketing spend really go up over a period of time, maybe over a quarter, looking at, well, what's our returns in the next quarter? Right? And maybe in real time a little bit, but also maybe over the next quarter as well. And then, again, just forecasting forward and seeing, are we headed for a tough time as a firm?

[00:13:07] Looking at our cases that we brought in, what's our work in progress that we're working on right now? What have we built that we still need to collect? All of those things, as you forecast and look forward into the future and add in the expenses that you have coming up, can really, really help avoid any pitfalls or cash shortages.

[00:13:29] You know, we really forecast forward and we do a cash flow forecast to see what our bank balance is going to be weeks and months into the future. Oh, wow. That's great. Yep. So how often do you communicate with the firm's CPA and their retirement planners? Yeah, usually a couple times a year there. So the CPA is usually two or three times to update quarterly estimates.

[00:13:56] You know, I think it's that, you know, just kind of, again, using our forecast and saying, well, we think the firm is going to profit X. And then they can do some math and figure out, OK, well, you're going to owe Y in taxes. Right? And that helps the business owner just be prepared, not get any surprises. You know, have a review meeting midway through the year. Hey, this is what we've profited so far. This is what we're forecasting. Right? So that you're prepared for that. So usually that's two or three times.

[00:14:25] And then on the retirement advisor side, that kind of can depend on them and how active they are at moving investments or changing investments or changing up strategies. I do frequently communicate a couple times a year, hey, this is what the firm is doing. We're growing or whatever the trends are. Right? We're growing. We're headed in this direction. We're improving profits.

[00:14:47] It's, you know, especially if we're trying to implement new strategies to save on taxes, like maybe, you know, a new 401k so you can max out, you know, your pre-tax contributions there and reduce taxes. We try to stay in the loop with all of those folks as much as possible. Good, good. That sounds like you've got that really good communication that you have to have with those other professionals. So tell me about a firm you worked with. You don't have to mention them, of course. But what was it like when you came in as the interim CFO?

[00:15:18] What were some of the messes that you saw? How did you make changes and what was the result? How did that improve the firm chairman or the firm founder's situation? Yeah. Scott, unfortunately, I have seen some real messes over the years. You know, there have been situations where, you know, I've got some good partners that I like to work with and that I'll turn to that are great experts that I've really vetted in this space.

[00:15:44] And there have been times where we've really come in and replaced the whole team. They had a bookkeeper in place. They had a tax preparer in place. They had a CFO in place. They didn't have a retirement advisor. So I brought that to the table. But the other three positions, we completely replaced. No kidding. Yes. Just not good books, not good bookkeeping work, not done in a timely fashion and done accurately.

[00:16:11] And then mistakes in a couple ways on taxes and not that they had to go back and refile. But if they were audited, they would have to refile. There would be changes that the IRS would make for them.

[00:16:27] And then the CFO just, you know, didn't have an organized system, wasn't really delivering enough, not enough insights, not really clear on where are we doing well in the business, where our numbers are really good and where are we not doing well. And so the difference there is night and day, right? I mean, from a business owner being in the dark, having a lot of worry, you know, am I going to have enough money for payroll, right?

[00:16:54] A lot of lost sleep at night, you know, not making the money that they want to make personally either because they really didn't have an annual plan for that and say and just sit down and say, look, these are the, you know, these are the vacation weeks I want to take. This is how much income I want to take. Here's the number of case volume that that's going to take, right?

[00:17:13] And putting that plan together and then versus, you know, working with us, we did sit down and put that plan together and reviewed attorney productivity and really looked at where are we inefficient and who's not hitting their hours. And does that need to, you know, put that person on an improvement plan and then, you know, figure out if they don't improve, do we need to part ways?

[00:17:36] So there's a lot that went into it, but the difference is just night and day versus now I have a forecast. I know how much money is in the bank. I know how much is going out. I know that I'm going to have money, right? I know what's going well in my business. I know what needs to be improved. Just a complete night and day difference. Much better sleeping at night. That's great. What a good business that you're in that you're able to bring this kind of value to the people that you work with.

[00:18:02] I love it. I use my strengths, right? I mean, I'm definitely accounting and finance, my expertise and, you know, my strengths is not the law, right? If I had to go to court and defend myself in law, I'm sure I would not do good. And, you know, attorneys, sometimes it can be the same way on the accounting and finance side, right? That's not their strength. You know, if they had to file their own taxes and do their own financial work, you know, maybe not the best. So I love to help out, love to work with them.

[00:18:29] So let me ask you this then. Where is the firm at where they realize they need to make changes? What's usually happening in the firm where the firm founder or the chairman says, I've got to take a closer look at the money? Yep. What happens to where they call you in? Yep. So a lot of times what I see, typically one of the first things that I'll do is I'll do a two or three year trends report and really look at what's happened over the last two or three years.

[00:18:56] And a lot of times what I see is a really, really good year, two or three years ago, strong sales, close eye on our expenses, very efficient there, strong profits, adding money to the bank, owner taking good distributions. And then last year or starting two years ago, maybe that declined.

[00:19:20] Maybe their sales went up, but they got less efficient and they really run into the problem of I'm not sure where the money's going. Right. And it doesn't it doesn't feel like we're having, you know, as good of years. Right. The bank that we're we're growing the firm, we're taking on more cases. Maybe we're even hiring, but there's not as much money in the bank left over. You know, we're not growing balances there. I'm not taking as much in distributions at the end of the year.

[00:19:46] Again, usually that's the trend that I see is a really good year two or three years ago and then a down year after that. And the owner really wants to dive in and figure out how do we what's going on? How do we fix it? How do we turn that around? Yeah. Wow. That's significant. It is. It can be, you know, just just night and day. Right.

[00:20:08] And sometimes, you know, especially if you have like a customer concentration, you know, where maybe you're doing a lot of legal work for one customer or somebody that refers a lot of business. And maybe, you know, the next year they don't refer as much, you know, that can make big changes really, really quickly. And again, it is very common that I see a really, really good year and then a down year. And we've got to dive into the numbers and figure out what's going on.

[00:20:35] Yeah. Right. So have you helped steer strategy based on what you've looked at? Yeah. So our process at our firm, we typically build out a financial dashboard for the owner and we will color coordinate that green, yellow, red. Green's where we're doing well. Red is obviously where we're not doing well and it needs improvement. And from there, then we start working with the owner on, you know, here's what this number is.

[00:21:02] Here are the activities that drive that number that gives you that result. And here are some things that we've done with other firms to help fix that red number and help turn it around. And then based on what the law firm owner knows about their firm, we kind of brainstorm and we put together an action plan to really change that red number. And that is very, very strategic based on the financials.

[00:21:27] You know, we know that that's the number that's holding them back from more profit, more cash flow in the bank, taking home more money. And so that's when that's where most of our time with our clients is spent. We do a lot of the financial legwork behind the scenes. And then we spend our time really focused on how are we going to improve this red number? That's great, Ryan. I know you've seen a lot and I know you've got a lot of wisdom that you can share with our listeners today. And I appreciate you being here.

[00:21:54] And I want to have you back on the show just to talk about one thing, the annual plan. Yeah. I think we could spend a whole show just talking about what's the annual financial plan that a law firm, founder or owner needs to follow. But until then, let's kind of bring it to a close with three action steps. What are three action steps you'd like to share with our listeners today where they can really get started implementing these ideas that you shared with us? Absolutely. I would say the number one thing is work on putting together your financial team. That's the first place to start.

[00:22:24] You've got to have the right team in place. And that can be hard sometimes finding professionals that really know what they're doing. They're responsive. They're ready to work with you. That can be a challenge. I highly recommend ask other attorneys that you know that own other firms. Right. If you need a recommendation, something like that, go network. So that's action step number one, I would say, is really get the right professionals in your life.

[00:22:48] Action step number two after that, I would say if you haven't sat down and reviewed your financials in a while, go and do that. Right. And again, Scott, as you mentioned, I tried to give a good plan here. Just a few quick numbers to look at. Go and look at those quick highlight numbers, put them in percentages and, you know, really evaluate what your trends are looking like and maybe how you could even improve your law firm moving forward into the future.

[00:23:17] And the third thing would be put together that action plan. If you're looking at, you know, payroll and it's not on a good trend, put together an action plan. What are the things that you can go and do? Well, I can go and look at attorney productivity. I can go and see, does the attorney need more work? Do they need to produce more? Are they meeting their hours? Right. Put together a plan.

[00:23:40] If you have, you know, once you find that number that, hey, this isn't going well, put together that plan and figure out how you can make changes moving forward into the future. That's great. Well, Ryan, thank you for being on the show. And before we go, tell us about your offerings, your services. I know you alluded to this earlier, but give us some more detail about what your company does, Ryan. Yeah, absolutely. So we come in and we work as, you know, we serve in that part-time CFO role seat.

[00:24:06] A lot of times we will work with the team that you already have in place, your bookkeeper, your tax preparer, your retirement advisor. Obviously, if you don't have one of those seats filled, we definitely have resources to bring to the table. But our process is we start with that annual plan. Definitely excited to do that episode when we do it. We start with the annual plan on, you know, what you want to do if you come to us in the middle of the year, through the end of the year and into next year. Or if we're into the year, we'll look at what do you want to do next year.

[00:24:34] And then based on that plan, my team and I will take the financials and we will narrow everything down to 10 or 12 key numbers that we really need to watch. We need to have trends on and we need to grade ourselves on how well that we're doing. And we call that our financial scoreboard and it's color coordinated, as I mentioned in the show, green, yellow, red. And then we help our clients build out action plans to fix the red numbers.

[00:25:00] And so if you reverse engineer it, we build the plan to fix the red numbers. And that hopefully gets your financial scoreboard on track so that it's all green. And if it's all green, we're going to meet our annual plan that we put together, which are really your goal numbers for the year. That's great. So that's a little bit about what it's like to work with us. It is all done for you. And one final question. Have you started working with firms where everything was all red and after you worked with them, it was all green? Yes. Yes.

[00:25:29] That's sometimes there is a lot of a lot of work like that. Usually, you know, I will will prioritize when that happens and really look at, you know, what's going to make the biggest impact. Let's tackle that first. But yes, we have been in situations where the scoreboard's all red or all red and yellow, you know, and they're not on track anywhere. And really, everything needs to be improved. Yes. That's great. Well, thank you so much for being here on our show, Ryan.

[00:25:59] I look forward to having you on in the future as a guest. Absolutely. Thank you for having me and taking the time. Thank you for listening to the Rainmaking Podcast. For more information about our recruiting services for international law firms, visit our website at attorneysearchgroup.com.

[00:26:20] To inquire about having Scott speak at your next convention, conference, sales meeting, or executive retreat, visit theraanmakingpodcast.com.