Friday, June 22, 2012

Celebrate FREEDOM FROM OVERHEAD DAY

Parsley Sage Rosemary & Ginsburg llp
“always a reasonable result for a reasonable fee, always”
MEMORANDUM

To:
All Partners
From:
Mike Marget
Date:
June 22, 2012
Re:
FREEDOM FROM OVERHEAD DAYCelebration Time C’mon


Saturday, June 23, 2012 marks FREEDOM FROM OVERHEAD DAY for most small and midsize law firms.

Although Hallmark is unlikely to produce any greeting cards, and the occasion will receive less recognition than National Pi Day,[i] FREEDOM FROM OVERHEAD DAY commemorates a significant annual event in the financial life of any law firm.  It is the calendar date when a law firm has earned enough money to cover its annual overhead costs.  From that date forward, all the cash goes to the lawyers!

In its most rudimentary form, a law firm’s revenue can be divided into two pools:
·        Overhead – occupancy, marketing, equipment, legal research and staff expenses
·        Lawyer Compensation

Assume your firm begins working on January 1st and earns the same amount of money each day while spending nothing.  When the law firm has accumulated enough money to pay all overhead expenses that will come due during the year, FREEDOM FROM OVERHEAD DAY has arrived.

According to a survey published last year, 47.4% of the average small firm’s revenue goes to paying overhead costs and the balance constitutes partner and associate compensation.[ii]  FREEDOM FROM OVERHEAD DAY is calculated by comparing the relative law firm revenue and overhead costs as reported by the survey and applying those figures to the 366 days in calendar year 2012.  The breakdown works as follows:

Overhead Element
% of Revenue
# Days
Dates Covered
Occupancy Costs
6.8%
25
January 1 - 25
Marketing Costs
2.4%
9
Jan 26 – Feb 3
Equipment Expenses
2.1%
8
February 4 – 11
Library & Reference
1.5%
5
February 12 – 16
Other Overhead
16.7%
62
Feb 17 – April 17
Staff Salaries/Benefits
17.9%
66
April 18 – June 22
Total Overhead
47.4%
175

June 23 is the 176th day of calendar year 2012.  In theory, June 23rd is FREEDOM FROM OVERHEAD DAY and it’s all profit for the lawyers from here on out.  Be sure to celebrate (and spend) responsibly.


[i] National Pi Day (or π Day) is celebrated by math enthusiasts around the world each year on March 14th (which can be abbreviated as 3.14 and Pi = 3.1415926535…).  Coincidentally, March 14th also marks the birthdate of Albert Einstein.  I’m told Pi Day is a big deal at Princeton.

[ii]Small Law Firm Economic Survey,” 2011 Edition, published by The National Law Journal and ALM Legal Intelligence (2011).  This survey focuses on the economics of firms with 20 or fewer lawyers.

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