For ordinary people on the street, their perception of what family lawyers do is likely to be limited to phrases such as ‘appear in court’, ‘divorces’, and ‘child support’, to name but three. However, experienced lawyers advise that not every task that a family lawyer undertakes within their business is associated with family laws and courts.
It has to be remembered that family lawyers are a business, and thus, issues relating to employees, office premises, and, most importantly, their finances also need to be addressed regularly. The latter, finances, must surely be considered one of the most important.
Sadly, many family lawyers have limited knowledge of financing and accounting and struggle with the many terms used within them. So, for any family lawyers who are likewise confused by the plethora of financial terms, here are explanations of ten of the most important financial concepts you are likely to encounter within your business.
#1 – Return On Investment (ROI): Normally calculated as a ratio or percentage, ROI is arrived at by dividing the amount of net profit generated by the amount invested to produce that profit. Investment spending can include marketing, equipment, and personnel.
#2 – Working Capital: This term relates to the value of liquid assets the business has available. In effect, it is the amount of money that is readily available to that business and is a guide to the short-term financial health of the business.
#3 – Revenue: One of the simpler financial concepts to understand, revenue is the amount of gross income a business receives, which, in the case of family lawyers, will primarily be the fees paid to it by its clients. Note this is not the same as profit as a business with lots of revenue may be suffering huge losses.
#4 – Valuation: Another reasonably simple concept, and is a measure of the total value of the business. This is useful to know when seeking investment or should you ever wish to sell the business.
#5 – Depreciation: This is applied to assets that lose their value over time. For a family lawyers business, this is most likely to apply to office equipment and any company vehicles it owns.
#6 – Amortisation: This term usually refers to either debts or intangible assets. It is a means by which the value of either is reduced over time, for example, with a loan being repaid over several years.
#7 – Earnings Before Tax, Depreciation, And Amortisation (EBIDTA): With depreciation, amortisation and taxes all being regarded as costs, EBIDTA is a measure of a business’s profitability before these are deducted.
#8 – Client Acquisition Cost (CAC): This can indicate whether the client acquisition methods being used are cost-effective. To calculate you simply divide your client acquisition spending by the number of clients they have generated.
#9 – Client Lifetime Value (LTV): Another calculation to identify whether you are maximising the revenue generated by every client you have. This allows you to ensure that low LTV clients are offered all services and that your high LTV clients are looked after especially well.
#10 – Debt To Equity Ratio: This measures a business’s liabilities against its equity value. It is a measure which investors are especially interested in as it identifies a business’s risk level and the amount it is funding itself via debts and loans.