Danielle Hendon is the founder and owner of 4 Corners CFO, LLC. Using her 10+ years in...
Christopher T. Anderson has authored numerous articles and speaks on a wide range of topics, including law...
Published: | August 27, 2024 |
Podcast: | Un-Billable Hour |
Category: | Practice Management |
How are you doing? Not you, personally, your business. Do you know? Because many small businesses, including small law firms, don’t have a true CFO, someone who doesn’t just do your taxes, but who helps you understand your business, your bottom line, and your future.
Danielle Hendon is the founder and CEO of 4 Corners CFO, bringing the benefit of “big business” financial analysis to entrepreneurs and business owners at a cost they can afford. She and her firm are “fractional CFOs,” providing the analysis and planning you need to stabilize your business, develop consistent revenue models, and grow with a goal in mind.
Hendon helps businesses, like yours, evaluate where they are, how things are doing, what your “real profit” is, and how to set and move toward goals.
Allocating overhead, hiring, understanding gross and net profit, and growing with purpose is all doable. Hear about “bottom-up budgeting,” understanding cash flow forecasts and how a CFO, even a part time CFO, can help spot red flags and build the pillars that will lift your business.
Special thanks to our sponsors Clio, TimeSolv, CosmoLex, and Rocket Matter.
Announcer:
Managing your law practice can be challenging, marketing, time management, attracting clients, and all the things besides the cases that you need to do that aren’t billable. Welcome to this edition of the Unbillable Hour, the Law Practice Advisory podcast. This is where you’ll get the information you need from expert guests and host Christopher Anderson here on Legal Talk Network.
Christopher T. Anderson:
Welcome to the Unbillable Hour. I am your host, Christopher Anderson, and today’s episode is one we don’t do nearly enough. Today’s episode is about business results, and I mean, I really mean that it’s a real treat. So take a moment right now, email your friends like, I’m waiting. Just go get it done. Because they don’t know they need to listen to this one, but they do. We don’t do enough shows about results we should, but the problem is that there’s a bajillion marketing people out there. So marketing shows are easy and there’s a lot of guests who want to talk about you and mindset, which is good. Those are, I think, really, really great shows when we do them. And we don’t do enough about office buildings, we don’t do enough about infrastructure, and we don’t do enough about business results. Even though that is one of the legs of the triangle we talk about.
It isn’t sexy except to some people, unless if you find profit sexy and I do, then this show is for you. Remember in the main triangle of what it is a law firm business owner must do. We’ve got to acquire new clients. We call that acquisition, and then we’ve got to produce the results that we promise to them. We call that production. And then an equal and equally important part of it is achieving the business and professional results for the owner. And today we’re starting to talk about business results. Business results. And at the center of the triangle driving it off for better or worse is you. And we’re going to discuss the tools and techniques. You as a law firm owner, practice manager, even the owner of your own docket, need to know to keep your practice healthy and profitable. And with that, I’m really excited to introduce my guest today, Danielle Hendon, and she’s the founder and co-owner of Four Corners, CFO, a firm that offers financial advisory services to small business owners. And as we all have learned in this show that includes small law firm owners, Danielle has decades of experience in corporate finance and accounting. With her passion for people now included in her business, she brings the benefit of big business financial analysis to you, to entrepreneurs. Instead of helping corporations now with increasing their share price, helping the shareholders get their value, Danielle now helps business owners increase their personal livelihoods so they can both live a good life and leave a legacy and have a lasting impact on their community. Danielle, welcome to the show.
Danielle Hendon:
Thank you so much for having me. And I love how you introduced it because we don’t talk about numbers enough. And any chance I get to get on and get people talking, I’m good.
Christopher T. Anderson:
Yeah, no, and I’m glad you do because, and one of the things I will challenge all of our dedicated listeners to do, everybody wants to look at their numbers when they’ve had a great month. Look at what we did Yeehaw, and that’s just ego. Everybody is afraid to look at their numbers when the numbers that they know are not looking good. The bank accounts low, they just had to borrow money to make payroll. It’s those times where people don’t take, they don’t want to know there’s dedicated, there’s committed statistics out there that the page views on E-Trade and Schwab for people’s 4 0 1 Ks plummet when the market goes down. Nobody will look at their portfolios when the market goes down and then when the market’s up, everybody’s looking at their portfolio every day and when do they need to be looking at their portfolio, when the market’s down, and when do you need to be looking at your books and your numbers?
Well, the answer is all the time. Good times, bad times, and most, and even more important, the middle times when things are just kind of ticking along. But anyway, this show’s about Danielle, not about me. I’m talking too much. So we’re going to talk to Danielle A. Little bit. And the first thing there are people use bookkeepers, people use all sorts of financial help, but very few people that bill themselves as CFO are working with smaller law firms. So what I’d like to do, just to get the show started, is first of all, understand how you got here, Danielle. My introduction was very brief and typically as always with The, Un-Billable, Hour quite inadequate, but you got to be good at something. So inadequate introductions is my thing. And so let’s just start with how you got here.
Danielle Hendon:
Yeah, I love giving my origin story, and I’ll try to keep it brief. I want to talk more numbers than me, but I actually started college as a music major, believe it or not. I thought I was going to go sing opera and make a living doing that until I learned that I don’t have friends in high places and I’m going to be broke. So I did have friends in the accounting side of the business.
Christopher T. Anderson:
I thought you were going to say, I learned I’m tone deaf. It was so sad.
Danielle Hendon:
No, I could sing, but it was not going to make me money. So I did have friends in accounting and I decided to go give that a shot. Believe it or not, there’s this weird correlation between music and numbers, and I loved accounting. I loved every part of it. Ended up getting my master’s did like most people do, and went into a public accounting firm on the other side of college. So very familiar with the firm experience and can relate to a lot of attorneys from that perspective along with the world that’s changing around us when it comes to that firm experience. And loved what I did with the public accounting firm until I started a family and realized I did not want to be working 80 hour weeks with a newborn at home. So I am in the Houston area. Most of my experience was oil and gas.
I landed at an oil and gas company on the other side of that public accounting firm, and I was there for a decade until prices crashed and they went through bankruptcy. And while I never thought I’d say I was grateful for experiencing a bankruptcy, it is why I can run the business I do now, having gone with them from billion dollar business to 20 people, I knew how to downsize these big business concepts to a small business because when the controller was down to two people left on the team, I’m the one getting the call that says, how do you want me to do this? Because we still had to be compliant. We still had to follow the rules. And now I get to take that just like you said in the intro, and bring it to small business owners in a way that makes sense for them, both procedurally, but also financially. The fractional world of back office help is phenomenal for small business right now. You don’t have to know how to do it all. There are people that love to do it and can do it for you.
Christopher T. Anderson:
Yeah, no, and I think that that’s very true. So that is a very interesting path. But so let’s just talk a little bit so that everybody’s not scared because scared right now, which is I think we just have to talk about it, right? Is okay, that was a great experience and it did help you to understand how to scale the concepts down. But what about growth? So do you have experience with small businesses now going the other direction, growing and needing to scale their businesses to a more complex level?
Danielle Hendon:
Absolutely. One of my favorite client stories is an attorney that came to us as a solopreneur. She had a paralegal with her at the time, and honestly, once she started, she just wanted to maintain the status quo. We don’t want to go backwards. And we have gotten to a point where the processes in place are able to support her in such a way that she’s like, let’s keep going. Let’s grow. Let’s scale this thing and step away and take time with family and do the things that are equally important in our personal lives as we do in our professional lives. I love to tell our clients that there are different areas that you’re going to scale in different phases you’re going to go through. And I personally have worked with business coaches in my business and they talk a lot about the ups and downs and the cycles that you go through as a business owner financially. The two biggest points when it comes to scaling, especially for a law firm, are going to be hiring your first revenue generating person. And then the second hardest is hiring that first non-revenue generating person and understanding the different impacts that those have on your finances and how to make a non-revenue generating person revenue affiliated. They’re still responsible for how well the firm is doing.
Christopher T. Anderson:
Yeah, no, that makes a lot of sense. So let’s talk about scaling in a bigger picture. I mean, I think you’re speaking to quite honestly, probably 30, 40% of my audience right there. It’s just like the other in that hiring, that first revenue, hiring the first non RAF person, but the other 60 to 70% are way past that and experience a different phenomenon. Scaling, they find, and I want you to speak to this, just they find that at certain points as their business grows, it seems like the systems that they built around it just don’t work anymore. What happens there? What needs to happen in organizing your finances or building your financial organization as the business scales through a million dollars, through $5 million through $10 million and on up, it’s
Danielle Hendon:
All about understanding the story that the numbers are telling you. And because of that story, you’re going to constantly be changing whether it’s scaling or reacting to what’s going on in the world around us, you as the business owner, have to keep your thumb on the pulse, your finger on the pulse. You have to know what those numbers are telling you. And that may mean scaling into multiple locations and you can no longer keep it all in one set of numbers because you’ve got multiple locations that you have to manage. And we have a client, I think we’re up to four locations now and getting into these, what I’m going to say are more complicated financial concepts of how do you allocate overhead, how profitable is that specific location? How do you know how much money they’re making and what does that mean? And making sure all of the numbers flow all the way down.
So at our firm, we’re a big believer in what we call bottom up budgeting. We budget from the ground up, the very most detailed level we can think of. We want to know what that is because then we can compare it to the actuals and figure out exactly what’s off. But as you grow and scale, even with that bottom up, you have to think about where is that cost or revenue originating and who’s responsible for it? And start to build those pillars in your business for the different aspects, whether it’s in your revenue streams or in your locations that are going to change the way you look at those numbers.
Christopher T. Anderson:
That makes total sense. This radio show here called The, Un-Billable, Hour, we have a financial obligation too, and it’s called our sponsors. So we are going to hear a word from them here. And then when we come back, we’re going to ask Danielle two things, the different financial people that might be useful for a small business, small law firm, and then we’re going to talk about the red flags that we can identify and how to address them. And then the conversation will simply continue. This is great. I think this is really, really useful for our listeners, but first a word from the people who make this show possible. And we’re back with Danielle Hendon. She’s the founder and owner of Four Corners CFO, and we’ve been talking about just how to introduce systems into the business and how they’re important for scaling. And before we talk about the financial red flags, I did want to talk about, because you said something at the very beginning of the show about you came from a public accounting firm.
One of the things that I’ve learned over the years have been that my CPA certified public accountant is an important person for my business, but not the only one. And I have other players, I’ve got a bookkeeper and I’ve got a management accountant, CFO type person, and I’ve got other accounting in the team. But can you talk a little bit about what kinds of people small businesses need and when? Because obviously if you hire a CFO and a bookkeeper and a management accountant and a controller and you make a hundred thousand dollars a year in revenue, that’ll bury your firm. You talked about hiring non rev people, right? So who do they need and when? And maybe describe for folks what’s the difference between all those words I just said.
Danielle Hendon:
Absolutely. And you named the three key players. You usually will eventually need a bookkeeper, a tax person, whether it’s a CP, a, ea, whoever it is you turn to for tax strategy and a forward-looking financial person, whether that’s a fractional CFOA, management accountant, a controller, whatever word the person puts on it. But I would say in the order of hiring them, most people will go find the tax CPA or EA first because you got to be compliant. And being somebody with a CPA myself, we all know what it’s like to make sure you stay compliant. So the tax person usually comes first. It’s an inevitable and nobody wants to get into tax code. I don’t even want to get into tax code and I am A CPA. The second one, and I would actually say this needs to be along with the first is a bookkeeper.
Because as an attorney, your billable hour is worth so much more than figuring out how on earth to use QuickBooks. Bookkeepers know what they’re doing, especially making sure that you find one familiar with trust accounting. We’ve seen far too many people struggle with that aspect of running their books, but finding that bookkeeper and somebody that can help you with that process is definitely worth the money at that point. Now that management accountant fractional CFO controller level is going to be something that most small business owners will wear the hat for themselves for a little while. And we are all about helping people learn how to understand their numbers when they’re not quite ready to hire. I will say, sort of like we did at the beginning of this, most people want to stick their head in the sand and going and buying a course that you are not going to actually do is not going to help you.
You’ve got to hold yourself accountable to the budget and the cashflow and the things that are going to help you grow your business until you can let go of them a little bit. You can never fully take your eyes off of it. With my background in audit, I’m a huge fan of what we call segregation of duties. You never want the one-stop shop. One person holds the keys to the kingdom and you’re not looking at anything else. At best, you are subject to error. At worst, you’re subject to fraud and nobody wants that. So making sure you’ve got all of those layers is really important.
Christopher T. Anderson:
And we could do a whole show on fraud. We really could, but let’s actually pick the one you didn’t talk about real quick and then we’re going to go to the red flags, which is the real problem. And in my opinion, people need someone as a fractional CFO, as that forward-looking business advisor who’s not them as soon as possible. It might not be when you’re at a hundred thousand, but it needs to be before you’re at a million. And that is this, it is self delusion. It’s not. It’s the inability, unwillingness. Listen, entrepreneurs, you have to be an entrepreneur, are optimists. And one of the ways to be an optimist is to shield yourself from bad news. Having a person whose job it is to tell you the truth about the numbers is a really good thing for your business because that enables you to act on the truth rather than hide from it because it doesn’t get better over time. So that’s a good segue to what are some of the hard truths that people have to face? What are some financial red flags that when you get started with the business, kind of poke their head up at you?
Danielle Hendon:
I’m actually going to twist this a little. If you’ve heard me on any other podcast, I talk about some generic red flags, but for attorneys specifically, there are three really key areas, and I’m sure you guys have heard all about them in other aspects, but they show up in your finances as well. And the very first one is going to be your collection rate and your receivables because a lot of people spend time looking at revenue and looking at the bank account, but they don’t necessarily go look at that accounts receivable aging either in Clio, in their QuickBooks, in whatever system you’re using to see who owes money when. Because as attorneys, you’ve got a very unique position with those retainers to avoid a lot of that headache.
Christopher T. Anderson:
If you use it,
Danielle Hendon:
Yes. But if you don’t use it, and I, trust me, we have plenty of attorney clients and we’ve had the conversation of, oh, well we don’t want to bill out more yet. We don’t want to re-up the retainer. We know there’s more work. What I love to do, and what we’re actually working on with a lot of attorneys right now is looking at that aging and saying, Hey, that one to 30 bucket, if they’re more than a couple thousand dollars, you should be re-upping the retainer. And if they’re in that 31 to 90 bucket, we need to be making some phone calls. It’s probably somebody that you didn’t re-up the retainer, they haven’t paid for whatever you finished on the case and you need to go get those funds. Or you’re billing stuff that’s never going to hit your bank account, right?
Christopher T. Anderson:
Yeah, it is ghost money, it’s never going to materialize. So I think those are two great ones to really focus on and really ones that really do, like you said, they affect law firms deeply. And yet law firms do have this amazing tool that we can use through, and you mentioned the other one earlier, which is trust accounting. Trust accounting is a profit making tool. And that combined with a retainer and making sure you replenish it early and stop work before the hole is dug are really, really important. Alright, so we talked about these three roles and some of the things that maybe when you’re doing the role yourself, of the forward looking advisor that you sweep under the rug. And I’ll tell you, as a law firm consultant, and I’ve been in so many firms, I agree with you. AR is the bane of these firm’s existence, and I’ve seen AR in excess of a whole year’s worth of revenue, a firm that’s doing a million dollars with more than a million dollars of AR on the books, they think it’s ar, it’s not. Those accounts are no longer receivable, that’s bad. You’ll
Danielle Hendon:
Not see that money. Yeah,
Christopher T. Anderson:
That’s bad debt, but they’re so reluctant to remove it from the books so they could continue to live in this illusion land that money’s going to materialize. Well, I won’t get on my soapbox about what AR really means, at least not yet. It might do it in a little bit, but it’s actually way worse than people think because a million dollars is not what that ar really represents to the business. It’s way worse than that.
Danielle Hendon:
No. And you’ve got to be looking at it regularly so you catch it in those early windows and can actually go get it.
Christopher T. Anderson:
So you can go get it if it’s getable and if it’s not, you stop digging the hole for yourself and for the client, senior partner, one of the first firm I ever went into said, used to say, I don’t mind doing pro bono work. I just like to choose the clients for whom I do it. And that’s an absolute truth. So okay, we’re a small law firm getting started and now I’m listening to Danielle on The, Un-Billable Hour. And I’m like, oh gosh. She just said, even just for starters, I need a CPA compliance accountant. You said ea by the way, that’s an enrolled agent I think you were talking about. That’s what you meant by ea. Just so people know, that’s someone who has a special relationship with the IRS, but they’re not working for the IRS, but they know the tax code inside and out and I need a bookkeeper. And then I heard Anderson say, and as soon as possible, you need this forward-looking tax advisor or not tax advisor, financial advisor, Danielle, that’s a lot of money. Which one of these firms outsource and fractionalize so that it’s not a huge burden to the business.
Danielle Hendon:
All of the above is outsourceable, A CPA at the bare minimum. You want somebody that’s going to give you good advice and get the regular filings done. You do not want to owe estimated taxes that haven’t been paid and now you’re getting penalized for it at the bare minimum. And you can find that for a couple thousand dollars. Bookkeepers a good bookkeeper with solid trust accounting knowledge because trust me, you do not want to go cheap here and end up trying to figure out your trust accounting two or three years down the road. It’s a nightmare. So a good bookkeeper that can do the trust accounting, they’re going to vary, but it’s worth so much more than your time. And a lot of times I’m a numbers person, I like to put things down on paper and we could literally do the math and say the amount of hours that you would pay a bookkeeper versus the amount of hours that you would take yourself to try to figure this out, it is never going to be worth your time. So I don’t care if you are truly just starting out putting the shingle up right now, the bookkeeper needs to be one of the first things you do. You don’t want to start off on the wrong foot and it’s not worth your time or money to do it.
Christopher T. Anderson:
And then what about that forward looking advisor? Is that outsourceable
Danielle Hendon:
Too? We have found it is outsourceable and that’s what we do personally fractional CFO work with our clients. I will tell you the number one place that we find our clients is when they’re hiring their first person, not necessarily putting up the shingle for themselves when it is just you. You know how many hours you’re putting into things, you’ve got a feel for who the clients are, all the things. For better or worse, you are wearing all of the hats. But when you start looking for that first revenue generating person and you start wondering what if the question, what if comes up? Then we’re starting to talk about the forward looking. What if I hire that person? Can I afford them? How many hours? My favorite exercise, especially with attorneys to do is a breakeven because if you have enough work to keep somebody else busy, it is almost never a bad idea to bring somebody on as long as you’ve got enough work. And we will literally do a break even and I’ll say, okay, how much are we paying ’em? How much are you billing them? And more often than not, we find five, 10 hours. That’s all you need them to do to break even. Right?
Christopher T. Anderson:
And then everything, it’s amazing. It is gravy. Yeah, exactly. Yeah. And then the other thing is I find with a lot of owners, particularly with their first hire, they’re like a lawyer. I don’t have $120,000 laying around to pay a lawyer. It’s like you don’t need it, right? Maybe you need 10,000 to get ’em started for the first month and then yeah, but if you don’t have the work, don’t hire ’em. But if they could even just take that work off your plate so you can go generate some more business, it might be a good idea. Alright, we’re going to hear from our sponsors here one more time. When we come back, what I want to turn our attention to profit, first of all, what is it? And then second of all, how do we improve it and get real profits? So we’re going to hear from our sponsors and then we’re going to come back and we’re going to talk about profit in just a second.
We are talking with Danielle Hendon. She is the founder and owner of Four Corner CFO. But I didn’t want to leave the show without talking about profit. I wanted to start with, before we talk about how to improve profit, which I want to talk to and how to turn around a firm who’s having negative profit, which we also call losses and how to turn that around. But before we have any of that conversation, I think we’ve got to get clear on the definition because as small business owners profit, we put the numbers in QuickBooks Bookkeeper does and there’s a number on the bottom line. We call that profit. That’s not always really true. So what is Profit Danielle?
Danielle Hendon:
Profit comes in two forms. When you’re talking about looking at your profit and loss, your statement, your financial statements, or if you know ’em as an income statement, there are two forms of profit that you want to look at. The first one is gross profit, and this is probably one of the hardest for any service-based business owner to see on their financials. The second one is net profit, and that’s that number you were talking about at the very bottom. The more important one is your gross profit. Knowing as a service-based business, what money is coming in and the cost of generating that money. There is a cost. Nobody has a hundred percent gross profit margin because they’re a service-based business.
Christopher T. Anderson:
But so many service-based business p and Ls show it as almost a hundred percent gross profit. So talk to us about that.
Danielle Hendon:
One of the first steps I go through with our smaller attorneys that don’t necessarily have public reporting requirements, this is not necessarily generally accepted accounting principles, but it makes the profit margin very clear, is to understand what are the revenue streams, not one single legal services line item. Please know what different matters and revenue streams you have. And then understanding which attorneys and paralegals or legal associates are responsible for that revenue. What is the billable time and what is the cost of that billable time? Or if you are a flat fee, what is the amount of time going into that flat fee service? That is where you get gross profit margin, what money is coming in and what is the cost of generating that money? That’s gross profit. The money coming in just because payroll is sitting below the line is not a hundred percent gross profit. You’ve got to figure out what is your hourly cost to generate that. Earlier in the episode we were talking about that break even when you hire somebody new, if you’re billing out at $350 an hour, you’re still paying, even if they’re on salary, a hundred dollars an hour or whatever that rate is to get to that, that’s your gross profit margin. That is at the end of the day, the most important piece. It’s got to pay the rest of the bills including you.
Christopher T. Anderson:
So are you putting fee earners salaries above the gross profit line
Danielle Hendon:
Depending on the client and how they look at their financials? Yes, sometimes we do. We will put those fee earners above the gross profit so when they see that number, they really know what’s left, what is left for my non-revenue generating costs.
Christopher T. Anderson:
Yeah, I think that’s huge. So then understanding gross profit. And then of course then there’s that bottom line when I said that people kind of play with that because one of the things that can or cannot be there is the owner’s salary or is the owner paying themselves a fair salary, high or low? And because okay, I’ve got a $1 million gross revenue firm and I’m the owner and I pay myself $50,000 and I look and I go and I’ve got $150,000 of profit. Like no you don’t. Can you talk a little bit about that? How does an owner know their real profit of their business?
Danielle Hendon:
Some of this gets into tax strategies because I am all for creating a reasonable salary that minimizes your tax burden. But part of that salary, and I will tell you every single attorney we have as a client is made up of salary and profit distribution. That profit distribution is an equal part, your owner’s compensation along with other things. So when we look at our clients, we talked about those revenue generating costs. We call everything below the line a non-revenue generating costs. And when we go through that with clients to analyze their expenses, we put them in one of three buckets. It’s either going to be a required cost, like your cell phone, your internet, I don’t know a business that runs without those. You’re going to have what I like to call the personal perks, the tax deductions that we know we can run through the business, the things that we can tweak when it comes to that profit number and they really add value to owner’s compensation.
One of my favorite examples to give is my kids are on my payroll. Do they add value to my business? Not a lick, but it is tax deductible. It’s tax defensible. They’ve got a job description, they do things, they don’t add value to the business. Everything else in those non-revenue generating expenses, if it’s not required, it’s not a personal perk. It is an investment in the business and that investment needs to returning time, money, or both back to the business in excess of what it’s costing you. So we go through that exercise, but my point of bringing it up is those personal perks are all part of your owner’s compensation and they’re not necessarily going to affect profit in a realistic way. Just like profit distributions will show on your bank account and your cashflow forecast, they’re not going to show in that net profit number. So it’s just as important to have a cashflow forecast as it is to have your actual physical budget.
Christopher T. Anderson:
Yeah. So let’s talk about that cashflow forecast and then I do want to come back and make sure that we do talk about how to turn around negative profit, but just like since you said the words cashflow forecast, I do want to hit on that because I think this is one of those, hide your head in the sand things. How frequently should a small business be doing a cashflow forecast and how far out should they be looking?
Danielle Hendon:
We recommend looking at your cashflow forecast and your budget for that matter every single month because as a small business owner, so much can change in a month and you have to be at the front and center of what’s going on in your business so that you can pivot and change either in the budget or the business and get where you want to go at the end of the day, the cashflow forecast does not have to be complicated. When people hear cashflow, they think about a cashflow statement, which is to be honest, total gobbledy goop coming out of the system. It means nothing to almost every business owner. And as an accountant, I don’t even like them. We don’t use them. A cashflow forecast really truly just takes your budget, it applies your collections rate and it applies the timing of your money. So if you are getting it upfront or if you’re getting it in 30 day terms at the end of things to figure out when is that cash going to hit the bank account?
And then it takes those components that are not on your budget and it layers them in because we want all our clients to be profitable. We want a component that says how much are we putting aside for taxes? Nobody wants the surprise in April that they owe all of this money. So what’s going to get put aside for taxes? What is getting taken out for profit distributions? The other half of your payroll that’s not on the p and l, and then what is going to be in there for any debt that you’ve taken on? Because it takes money to make money, and sometimes we have debt on our books that is going to hit your bank account, but it will not hit your p and l or your budget,
Christopher T. Anderson:
Right? That’s right. Yeah. Paying that debt back, I often say paying debt back can only be done with profit. The accumulation of debt’s just negative profit. When you have negative profit, you have to borrow money to make up the difference or eat into reserves, and then when you pay back those reserves or pay back that debt, you paid it with profit. Which I guess is a good segue to what I think will be our final topic, which is, okay, we realize we have negative profit, we have losses. What are some levers that a small business can pull to turn that around? What could a business do about not having the profits that they want to have?
Danielle Hendon:
I want to start by saying and normalizing the negative profit, especially if you are early on in business, like I said earlier, it takes money to make money and you are going to see people that take on please not credit card debt, but sometimes where you take on this debt in order to make money on the other side, and that’s normal, but we need to get out from under it. And to do that, if you are sitting in negative profit or negative equity, either one is a bad scenario. If you’re sitting there, there’s three profit levers in every business and they’re the same regardless of what business you run, corporate small, no matter the industry, the very first one and the easiest one, especially in the inflationary times, I can’t tell you how many emails I’ve gotten this summer of people raising rates, is to raise your rates.
And especially as attorneys, you guys have access to see what is the average billable going on in your area, what are the rates looking like and where are you in terms of that? Do not underprice yourself. Make sure that you raise your rates regularly to stay up with what’s going on. And especially if you are a flat fee service, make sure that you are staying profitable in that flat fee and by a good margin. The second one, and this goes to the profit margin, is really truly knowing what your profit margin is for each revenue stream. For attorneys, that also means knowing what the profit margin is for each of your people, your attorneys, your associates, your paralegals, what is that profit margin and how are we utilizing that? Because when you know the most profitable, that’s what you want to be using the most of.
That’s where you want to be bringing in the most. So understanding profit margin by product service person in your business do not have that one single legal services line that lumps it all together and you don’t look at anything else. And then the last one is those expenses that we talked about earlier. Cutting your costs is one way to raise your profits. And I would say specifically, we all tend to have shiny object syndrome and we layer on all these different systems that do these really cool things that may only need to be in one. The other area that I see a lot with our attorneys and sort of shiny object syndrome is CLEs. We all want to go to the really cool conference and get to hang out with everybody, but at the end of the day, while CLEs are required, I know from my CPA we can go pay like 200 bucks, get the most boring, unlimited CLEs possible and be done. So that cost, the required cost, usually a couple hundred dollars per attorney, but your conference is actually an investment. And if you’re not coming back from these conferences with things that you can implement to save time, money, or both, then that is not a good investment in your business. No matter how much you do it and love it, you have to make that investment worthwhile for the business.
Christopher T. Anderson:
Cool. So the three levers then were increased rates. So enhanced revenues, sell
Danielle Hendon:
The heck out of your most profitable thing, know your profit margins,
Christopher T. Anderson:
Sell, yeah, know your profit margins and then push work to the most profitable practice area, most profitable product, most profitable people. And then the third one is look for some costs. And I think you mentioned CLEs. I think it was great because what you didn’t mention, which is where a lot of people go, are costs that generate revenue, right? Don’t go and cut marketing, don’t go and cut. At least marketing that’s producing right? It’s always okay to go back and look and see is some of this marketing just wasteful? But don’t cut into things that generate revenue. Focus on the ones that do more. So I think that’s all really great advice and that is great advice. That brings us to the bottom of the show. That went so fast and I hope it definitely was valuable. But I know there’s a ton of questions that people are going to have because we just really started this conversation. Where can people reach out to you, Danielle, if they’ve got further questions and they just want to see whether it’s about working with you or just clarifying something that we talked about. How can people reach out to you?
Danielle Hendon:
We’re going to have a landing page set up just for you guys. It’ll be on our website, so it’s the number four Corners cfo and then it’ll be slash Christopher Anderson. Just for you guys, my
Christopher T. Anderson:
Name, how awesome, right? You’re on the website. Cool. So four corner cfo.com/ Christopher Anderson. So nice. Danielle, thanks so much for being on the show.
Danielle Hendon:
Thank you so much for having me.
Christopher T. Anderson:
No, it’s been my pleasure. And of course this does wrap up this edition of The Un-Billable Hour, and I thank all our listeners for being with us, and I think this was a really valuable show, so I can hear them applauding for you right now. I can hear it. Our guest today, of course, has been Danielle Hendon and she’s the founder and owner of Four Corner cfo. And if you have more stuff for her to ask questions or find out more, you’re making a whole web landing page just for you. Add four corner cfo.com/ Christopher Anderson, and that’s my name. And I look forward to seeing all of you next month with another great guest as we learn more about topics that help us build the law firm business that works for you. And just a last little reminder, don’t forget about the community table. On the third Thursday at three Eastern, we have the community table where you can dial in or zoom in as the case may be to the show and ask your own questions and you can ask about anything. And Danielle, I’m going to put you on the spot here. Would you be interested in being a guest on the community table at the next show after this show airs? I
Danielle Hendon:
Would love to, and we can get into all the fun questions.
Christopher T. Anderson:
Awesome. So Danielle will be there at the community table on the third Thursday right after this show aired. So look at, if you’re reviewing old shows, look at what date this was, the third Thursday right after that, Daniel will be on. You can ask her your questions live. And of course, please also remember you can subscribe to all the additions of this podcast and the community table at legaltalknetwork.com or on iTunes. Thank you all for joining us. We will speak again soon.
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