Do you know your firm’s cost of doing business? It’s easy, right? Look at your monthly Profit & Loss statement and checking that bold figure towards the bottom that reads, ‘Total Expenses.’
For me, I like to get a little more surgical than that.
Knowing your cost of doing business, or CODB, is critical from several perspectives, including your pricing strategy, establishing fee targets, monitoring cash flow, and so on. Regardless of your fee methodology (fixed pricing, time-based, no won no fee), understanding your CODB, say, per hour, is critical. And I mean, per human hour. Let me explain…..
Let’s assume all your full-time staff are engaged (and remunerated) for 38 hours per week. There are 52 weeks in a year, therefore each staff member is ‘on the books’ for 1,976 hours per year. Yes, they take leave and so on, but even when they are not in your office, they are still an expense to your firm.
Extrapolating that result then means:
- For 10 full-time staff = 19,760 hours.
- 50 full-time staff = 98,800 hours
- 100 full-time staff = 197,600 hours, and so on.
Yes, understanding the human hours in a workforce may not be that linear an equation given part-time and casual staff, but it can, and should be known. Furthermore, this human hours figure should be determined for all staff, not just fee earners.
To determine your CODB per hour, you need to take your ‘Total Expenses’ result from your P&L and divide it by the number of human hours in your firm for a set period. For example, if your firm had 10 full-time staff for an entire year, your firm’s human hours in that year is 19,760 hours. Let’s assume your firm has Total Expenses of $1,400,000. Therefore, your firm’s CODB is an average of $70.85 per human hour.
Let’s extrapolate that further with our firm of 10 staff:
- Each hour of the day your expenses are $708.50, and
- Daily, for an 8 hour day, your firm’s expenses are $5,668.
Again, understanding and monitoring this figure is important particularly at the granular level: each hour, each day, each week. It is an effective tool to guide and develop your fixed-fee pricing models, particularly if your firm has a good grasp of the average human hours required to be contributed to each matter. Above all, it is good business to have a firm grasp of your average expenditure and what it costs you for down-time and so on.
And yes, we have a tool for that at Lawganised.
Let me know if you need any assistance in developing and monitoring your CODB.