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CPA:  How to Fairly Calculate Timekeeper Profitability Ratios

How to Fairly Calculate Timekeeper Profitability Ratios

Note: The following is an excerpt from a new eBook titled 15 Ideas for Getting a Jump-Start on 2015 which is freely available with registration.

One concept that my CPA firm is working with several law firms on is adopting an objective way to gauge and compare the profitability of individual producers, all the way from paralegals to partners.

For obvious reasons, most firms attempt to measure individual profitability, but many end up including overhead expenses in their calculations, which is really just a numbers game and tends to put lower-level timekeepers at a disadvantage in calculating their profitability contribution.

The fact is, if a law firm generates sufficient gross profit from revenue to cover overhead (minus direct employee expenses), there’s really no value gained in allocating those expenses. We advocate instead that law firms determine each producer’s profitability ratio using only his or her direct expenses. At the end of the year, any producer who generates revenue equal to or greater than twice his or her direct expenses is contributing to overhead, meaning that everyone in the firm is earning net income from that person’s work.

What do we consider direct expenses? Just as it sounds, any benefits directly attributable to one producer, including all types of employer-provided insurance:

  • Payroll and payroll taxes
  • Insurance, including: health, dental, vision, disability, long-term care, and other insurance regardless of tax-deductible status
  • Retirement
  • Other benefits directly attributable to one timekeeper, such as: education, travel, seminars, and any other expenses other than those attributable to overhead

For any firm that wants to make sure all of its producers are profitable, this is a great way to easily compare the entire firm without getting muddled into the whole “how do we allocate overhead” trap.

It also helps overcome the often incorrect preconceived ideas law firm owners and partners develop as to who their strongest performers are.
Once the proof is in the numbers, even the most overlooked paralegal can prove his or her worth amongst the firm’s top producers. Reaching that two-to-one ratio may also mean that producer is worthy of a bonus, no matter how high or low on the organization chart.

The complete eBook, with 14 other expert viewpoints, is freely available for download with registration here.

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Michael J. Wasco is a Certified Public Accountant specializing in law firm accounting and taxation with Kinol Sharie Leyh & Associates in the greater Pittsburgh area. He can be reached at MWasco@KSLAssociates.com.

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About Paula Avery

Paula Avery