22 June 2022 Mini Series: The Business of Law Firms - A Firm's Accounts

Mini Series: The Business of Law Firms​

A Firm's Accounts​

Overview​

We will look at some key drivers of law firms as a business in what will be the first in a mini-series on the business of law firms.

This week’s goal is to demystify a law firm’s accounts (specifically its income statement) so that you can start reviewing law firm accounts and understand what is relevant and — importantly — why.

We will look at Clifford Chance LLP’s most recent accounts because, as it is based in the UK, it must file detailed annual accounts with Companies House annually.

Accounts: Key Terms​

For all businesses, the accounting terms revenue, expenses, and profit tell us:

1. How much money was brought in?
2. How much money was spent?
3. How much was left over?

While accounting is more than just reciting numbers from the income statement, the income statement is the first place to start. From there, you can begin to analyse what the numbers mean.

In Clifford Chance's case these figures are given on p 10:


You may wonder why each of these figures are broken up (with profit stated in four different ways). For revenue and expenses, you want to be able to distinguish between the core parts of the business and the auxiliary parts.

Revenue​

The figure given for revenue refers to all money brought in for doing client work. This may seem obvious, but it is a crucial point to emphasise in an interview: all law firms make money by offering legal services. That is it.

Of course, there are more complex considerations, such as when the firm can count client work towards revenue: is it when the work is done? When it is invoiced? When does the client pay? What does the £3m indicate? Food for thought, but the answer lies in the notes (try p 25 and 31).

Expenses​

A law firm’s biggest expense is its talent — that is, paying its lawyers and support staff. This is also an important figure because the relationship between revenue and cost of talent is the basis for more granular key performance indicators used by senior leadership to manage the firm’s resources — something we will cover in future series.

Other operating costs (£300) are not specified, but likely include costs of key infrastructure like IT and software systems.

Profit and the income statement​

Profit means different things for different people under different circumstances (especially for law firms). That is why profit is restated in four ways (and something we will pick up on in a later series). But for now, operating profit refers to the revenue minus expenses for all core parts of the business activity. This is a useful metric when comparing performance across different firms.

Taken as a whole, the income statement is one of three key ways to get a sense of how successful a firm is.

How is this relevant to your interviews?​

Firms want applicants to demonstrate their understanding of law firms as a business. It is not uncommon for an interviewer to ask you to demonstrate a fundamental understanding of how the firm makes money, what its primary expenses are, and what bearing this has on a law firm’s long-term strategy.

Today, we have covered the basics surrounding how law firms make money and what their main expenses are. More generally, understanding the importance of revenue and expenses and getting acquainted with accounts is an invaluable commercial skill to develop as an applicant and one that will set you apart from others.