As I’ve mentioned in some of my other videos, I have changed my vision for the firm. When I started out, I thought a dozen lawyers or so, maybe the same number of support staff, but I’ve realized that profitability and size are completely not correlated and I no longer desire to have a large law firm, particularly because I’m not interested in being a manager of people. At this point, I’m interested only in profitability, the bottom line. And so that is generally a smaller, efficient law firm. And so I would encourage people who want to achieve a lot of size and scale to think about whether it’s a vanity thing or whether that is really what their goals are. I would also say that as somebody who has the same amount of personal finance experience as anyone else, and a certain amount of insight into the way that law firms are run, since I was an Amla 200 partner for seven years, and I got to watch the partner meetings and look at how we talked about profitability and cost and revenue, I knew a little bit, but in terms of running a small law firm and thinking about what to do with money, this is sort of new to me.

And I became exposed to this concept called Profit First, which is a popular way of managing cash. And there are profit first professionals, people who are trained in profit first, and I don’t follow it exactly, but the way that I manage the finances of the firm is very much inspired by some of the profit first ideas, which I think make a lot of sense. A lot of people will take all of the revenue that comes in and subtract off the expenses and what’s left over is the profit. And a lot of times if you do it that way, if you make profit last, you wind up with no profitability and you wind up looking at your profit and loss statement at the end of the year and it shows you made a certain profit, but it’s not really there because what difference does it make if your P&L says you made a profit, but your bank account doesn’t?

So making sure that you manage cashflow in a way that there is actually money that is sitting there as profit generally can be achieved easiest by taking your profit off the top first and then whatever money is left over. So you take your revenue, then you take your profit, and what is left over is what you have to run the law firm, and then there’s a little bit more austerity perhaps. And that way you’re guaranteed to make a profit. If you allow your expenses to balloon and you bring in the revenue and you subtract them and you wind up at the end of the year showing a small profit, what’s the point of it all? So the way that profit first works, and I’m probably going to screw this up because I’m not a total adherent to it, is money comes into the operating account and it moves into different buckets.

So I have a whole bunch of different bank accounts, money comes in, there are auto transfers. It goes over into the payroll account and the account where health insurance and dental insurance and 401k and ADP pulls money out to pay my employees. And money automatically goes into a tax savings account and certain ratios so that I’ve got the cash there to pay the taxes. And there are other accounts where money kind of waterfalls out of my operating account into. And one of those accounts is a profit account. And so I am saving for profit a part of every dollar that comes in. And so the top line is great, gross revenue is great. The bottom line is better. I am not somebody that likes to cheap out on buying things from my firm. I’m recording through some very nice equipment right now and I’m looking at a 48-inch computer monitor and we’ve got nice office space and we’ve got the best kind of healthcare.

And so I’m not somebody who’s going to go cheap. And you’ve probably heard me in other videos say, “Get the CPA and get the bookkeeper and get someone to answer your phones and to get all this other stuff and to buy insurance.” And I agree with all those things, but the temptation to spend a lot of money and the temptation to have leakage on the cost side that really cuts into the profitability of the firm is really there if you don’t have your eyes on it closely. And so thinking about how you’re going to manage cash so that you make sure that you have a profit that isn’t just profit on paper, but it’s actually a profit where there’s some cash that you could choose to invest or you could choose to spend on a vacation or whatever the heck it is that you want is important.

So cash management is an important part of running a small law firm, and I wouldn’t get in the business of operating your law firm until you have an idea of how you’re going to manage the cash and usually having at least a half dozen different bank accounts, all with the same bank, but just so you can move money around once it starts to come in is a really good idea.