The Attorney's Guide to Profit Margins: Why Revenue Isn't Enough

Understanding the number that actually determines whether your law firm thrives or struggles

Your firm billed $750,000 last year. Congratulations—that’s impressive! But here's the question that actually matters: how much did you keep?

Revenue is vanity. Profit is sanity. And profit margin—the percentage of revenue that becomes actual profit—is the number that determines whether your law firm is building wealth or just staying busy.

At Accounting Girl, we talk to attorneys every week who are surprised to learn their firm isn't as profitable as they assumed. They're working hard, billing well, and watching revenue grow—but somehow, there's never enough money left over. The answer is almost always hiding in their profit margins.

What Is Profit Margin, Really?

Profit margin measures how much of every dollar you collect actually becomes profit after paying all expenses. It's expressed as a percentage.

The basic formula is simple: Profit Margin = (Revenue - COGS - Overhead Expenses) / Revenue × 100

If your firm collected $500,000 and had $400,000 in expenses, your profit margin is 20%. For every dollar that came in, you kept twenty cents.

But here's where it gets more nuanced: There are different types of profit margin, and understanding each one tells you something different about your firm's health.

Gross Profit Margin looks at revenue minus direct costs of service delivery (this includes recouped or non-billable advanced costs, merchant service fees and contracted staff compensation. This tells you whether your pricing covers your direct service costs.

Operating Profit Margin subtracts all operating expenses—rent, software, insurance, marketing, payroll (including Owner Wages and taxes), and administrative costs. This tells you whether your business model is sustainable.

Net Profit Margin accounts for everything, including any IOLTA interest, depreciation, and non-regular income (like credit card rewards). This is your true bottom line.

For most law firm owners, operating profit margin is the most useful number to track regularly.

What's a Good Profit Margin for a Law Firm?

Benchmarks vary by practice area, geography, and firm size, but here are general guidelines.

Solo practitioners should typically target 40-50% operating profit margin. Your primary expense is your own time, and overhead should remain relatively low. If you're solo and your margin is below 30%, there’s a glitch with your pricing, your efficiency, or your overhead expenses.

Small firms with less than 5 employees typically see 25-35% margins. Adding headcount increases expenses, which compresses margins—but should be offset by increased revenue and leverage.

Mid-sized firms (6-15 employees) often operate at 20-30% margins. Complexity increases with size, and margins tend to tighten as firms grow unless they maintain disciplined cost control.

These are rough guidelines. The more important measure is your trend: Is your margin improving year over year, holding steady, or declining?

Why Law Firm Margins Suffer

When we diagnose profitability problems at law firms, we typically find one or more of these culprits.

Realization Rate Problems

Realization rate measures how much of your worked time actually gets billed. If an attorney works 8 hours but only bills 6, their realization rate is 75%.

Low realization devastates margins because you're paying for time that never generates revenue.

Common causes include poor time entry practices, excessive write-offs, working on matters without clear fee agreements, and inefficient workflows that require more time than the work justifies.

Every percentage point of realization you recover drops directly to your bottom line. Adding billable hour requirements for your staff is key to increasing the realization rate.

Collection Rate Problems

Collection rate measures how much of what you bill actually gets paid. If you bill $100,000 and collect $85,000, your collection rate is 85%.

Uncollected bills represent work you've already paid for (through salaries and overhead) that never returns value. Collection problems often stem from poor client selection, unclear billing practices, delayed invoicing, and inadequate follow-up on aged receivables.

Overhead Creep

Overhead expenses have a way of expanding without deliberate decisions. The software subscription you forgot to cancel. The office space that's larger than you need. The services you're paying for but barely using.

We recommend reviewing every recurring expense quarterly with a simple question: Is this generating returns greater than its cost? If you can't articulate the value, cut it.

Underpricing

Many attorneys, especially those in competitive markets or early in their careers, underprice their services. They're afraid to charge what they're worth, so they leave money on the table with every engagement.

If your realization and collection rates are strong but your margins are still thin, pricing is likely the problem. Your rates need to cover not just your time, but your overhead, your expertise, your risk, and your profit.

Inefficient Operations

Every hour you spend on administrative tasks instead of billable work costs you money. Every duplicate effort, every manual process that could be automated, every communication breakdown that requires rework—these inefficiencies accumulate into margin compression.

Investing in systems and processes often pays for itself through improved operational efficiency.

Improving Your Profit Margin: A Systematic Approach

Margin improvement isn't about any single tactic—it's about systematically addressing every factor that affects profitability.

Start with Measurement

You cannot improve what you don't measure. Make sure you have accurate financial reporting that shows your true profit margin monthly.

If you're currently guessing at profitability based on your bank balance, that's the first problem to solve. Bank balance tells you cash position; profit margin tells you business health. Bank balance and profit margin are not generally going to be the same numbers.

Analyze by Practice Area and Client

Aggregate margins mask important variations. Some practice areas might run 40% margins while others barely break even. Some clients might be highly profitable while others consume resources without adequate compensation.

Break down your profitability by practice area, matter type, and client. Double down on what's working; fix or eliminate what isn't.

Attack Realization First

For most firms, realization offers the quickest path to improved margins. Better time capture, stricter scope management, and fewer discretionary write-offs can add percentage points to your margin within months.

Train everyone in the firm on proper time entry. Review write-offs monthly and question patterns. Address scope creep before it accumulates.

Tighten Collections

Unpaid invoices are profit you've already earned but not yet received. Aggressive accounts receivable management—clear payment terms, timely invoicing, systematic follow-up—converts that outstanding balance into cash.

Set targets for days sales outstanding and accounts receivable aging. Celebrate improvement and address deterioration immediately.

Review Overhead Quarterly

Schedule a quarterly overhead review where you examine every significant expense category. Are you getting value? Could you negotiate better terms? Is there a more cost-effective alternative?

Technology is often a fertile area for savings. Firms accumulate subscriptions over time, and many pay for features or capacity they don't use.

Consider Your Pricing Strategy

When did you last raise rates? If it's been more than 18-24 months, you're probably underpriced. Inflation, increased expertise, and market conditions all justify regular price adjustments.

Test the market. Raise rates on new matters and observe the response. You may find clients are less price-sensitive than you assumed.

Invest in Efficiency

Sometimes improving margins requires spending money. Better practice management software might cost $500 per month but save 20 hours of administrative time. An outsourced bookkeeper might cost $1,500 per month but free you to bill an additional $5,000.

Evaluate efficiency investments against their return. The goal isn't minimizing expenses—it's optimizing the relationship between expenses and revenue.

The Profit Margin Mindset

Attorneys are trained to think in terms of hours and billing rates. But running a profitable firm requires a different mindset—one that focuses on margins, not just revenue.

Every decision you make affects margin: the clients you accept, the work you take on, the staff you hire, the overhead you carry, the rates you charge. Profitable firms make these decisions intentionally, with clear understanding of the financial implications.

This doesn't mean becoming ruthlessly focused on money at the expense of client service or professional values. It means understanding that a profitable firm is a sustainable firm—one that can invest in better service, attract better talent, and serve clients for the long term.

Getting Help

If your profit margin is a mystery, or if you know it's lower than it should be but aren't sure why, you don't have to figure it out alone.

At Accounting Girl, we specialize in helping law firms understand and improve their financial performance. We provide the virtual CFO guidance that turns financial confusion into strategic clarity.

The investment in professional financial support often pays for itself through improved margins. When you understand where your money goes, you can make it work harder.

Your firm deserves to be profitable. Not just busy—profitable.

Accounting Girl provides specialized accounting and virtual CFO services exclusively for law firms. We help attorneys build the financial systems and insights they need to run profitable, sustainable practices. Connect with us to discuss your firm's financial health.