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June 3, 2024

When Does a Law Firm Need a Fractional CFO?

Most law firms get started because the founding partners have a different idea of how they wanted to practice. Maybe they’re escaping the grind of Big Law, or maybe they have a vision of the kind of legacy they want to leave through their practice.

It’s rarely because someone is excited about running the day-to-day operations.

In the early days of a business, a successful firm handles the basics with no problem: Find a space, hire a few staff and a bookkeeper, secure insurance and benefits, purchase or lease software, hang up your shingle, launch your website, get the word out and do excellent work. Rinse and repeat.

But in between the rinsing and repeating, there’s the ever-growing financial side: invoices, bills, payroll and distributions. Maybe you have a term loan or you took out a line of credit to get started. A bookkeeper comes in handy for transactional pieces, but there are other issues: You and your partners probably want to get paid as well. Sometimes there’s a lot of cash in your bank account, but is it truly excess or will you need it next month? Can it be a distribution? How much? 

It’s a lot to keep track of. And that’s not even counting the questions about financial management you don’t know you need to ask. Now we’re outside the wheelhouse of even the best bookkeeper. 

As your company reaches $2 million dollars in annual revenue, other questions about the firm’s finances arise: 

  • How do we compare to other firms? 
  • Is our net income what it should be? 
  • Are we pricing correctly? 
  • How much cash do we need to retain for working capital? 
  • Is it time to hire more staff, or do we need more work for the people we currently have?

These aren’t back-of-the-napkin questions but answering them is essential to any firm’s growth. 

That’s where a Chief Financial Officer would take the reins: but in a growing firm, there often isn’t enough work to justify a full-time CFO, or the budget to justify their salary plus benefits.

When you’re in the position to need the expertise of a CFO who can handle your financial operations but not yet at the stage of growth where you can afford the full cost, outsourcing the position to a fractional CFO is the most logical solution.

What Does a Fractional CFO Do for a Law Firm?

A trusted financial advisor, Fractional or Virtual CFO enables firm owners to make data-driven decisions to get closer to their goals through a mix of financial strategies and strategic planning. They provide the accounting and financial reporting services designed to keep a business in good financial standing, including weekly reconciliations and monthly financial statements.

These services become the baseline for developing the tools to improve financial performance, in particular long- and short-term financial forecasts, and cash flow management.

With the help of a forecast, you are able to anticipate how much cash is in the bank — and see if it is enough to keep your firm healthy. A forecast also allows you to run scenarios around decisions to open a new location, improve operational efficiency, or change your pricing.

A CFO can help entrepreneurs understand the financial and non-financial metrics that drive their business. Rather than aiming for abstract goals like, “Grow the company 10% this year,” these non-financial drivers allow firm owners to focus on what they can control: Is my effective billing rate where it should be? Do I need to find more clients?

By zooming in on these areas and determining where there is room for improvement, a CFO helps firms to increase profit margin and improve their bottom line.

But the CFO isn’t just a number cruncher: they are a trusted advisor who — armed with data — helps managing partners understand the way forward.

How Does a Fractional CFO Work with a Law Firm?

As a financial consultant with years of experience, a fractional CFO generally works with multiple clients on a subscription or project-basis.

Some are generalists while others specialize in the legal industry, developing deep expertise on the challenges and opportunities law firms face. CFOs specialized in law firms will have access to industry benchmark data, to help you understand if you are measuring up to your peers. They also will be best prepared to decide the specific law firm KPIs you need to be tracking.

Some CFOs work independently as consultants, which means they perform all the functions for you, including bookkeeping and strategy. Others are part of a full-service firm and offer a team. Led by an expert CFO and supported by a senior accountant, tax specialist and other accounting experts, the team provides significant redundancy, so someone is always available and work never stops for vacations or illness.

In addition, hiring a CFO as part of a full-service CPA firm means you can access additional opportunities for support depending on your firm’s changing needs:

  • Financial Wealth and Estate Planning
  • Retirement Planning
  • Tax Planning
  • 401k Audit
  • Additional Advisory Services

When Is It Time to Hire a Fractional CFO?

When firms reach the $2-$3 million revenue mark, they often experience a plateau in growth where the business of law risks distracting from their ability to focus on the practice of law. In that phase, where the cost of a full-time CFO is prohibitive, but so is the opportunity cost of not having expert financial analysis: that’s when it’s time to hire a fractional or virtual CFO.

If you’re curious about what a virtual CFO can do for your law firm and want to pull back the curtain to see how we get it done, download my newly released law firm CFO playbook: Judicial Dollars and Cents.

You can also learn more about our virtual CFO services for law firms by signing up for a free consultation below.

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