A CFO Reviews a Real Law Firm P&L… Here Is What She Found

A CFO Reviews a Real Law Firm P&L ... Here Is What She Found

After a speaking event a few weeks ago, a law firm owner asked if I would look at their profit and loss statement and tell them what I saw. I said yes, on one condition: I needed to be able to use it as a podcast episode, fully anonymized. They agreed.

This post is the written companion to that episode. The firm is a US-based family law practice with one owner, ten attorneys, and between eight and twelve support staff. Annual revenue in 2025 was $3.7 million. The firm has made the S corporation election. I have changed the firm name and adjusted a few account descriptions to protect their identity.

What follows is everything I noticed, what I would ask, and what I would change, with nothing held back.

The First Thing I Look At: Net Income as a Percentage of Revenue

Before I look at any individual line item, I look at two numbers: total revenue and net income. Then I calculate net income as a percentage of revenue.

For this firm, net income was $835,000 on $3.7 million in revenue in 2025, which works out to 22%. In 2024, net income was $166,000 on $3.5 million in revenue, which is just under 5%.

The improvement from 5% to 22% is significant. Something meaningful changed between those two years, whether a large investment in 2024 that did not repeat, a rainmaker attorney who joined and brought new business, or better expense discipline. I do not know without asking, but the shift is real and worth understanding.

My target for law firms is 30%. That is the third benchmark in what I call the rule of thirds.

The Rule of Thirds: What a Healthy Law Firm P&L Should Look Like

The rule of thirds is a framework I use with every law firm I work with. It is not something I invented, but it holds up consistently across professional services firms of various sizes.

The idea is straightforward. If you think of your revenue as a pie, divide it into three equal portions:

• One third should go toward people costs, including wages, payroll taxes, benefits, and contract labor.

• One third should cover overhead, including rent, software, insurance, marketing, and all other operating expenses.

• One third should flow to the owner as net income, available for distribution, reinvestment, or both.

At 22% net income, this firm is moving in the right direction but has not yet reached the target. Based on the numbers I reviewed, the primary drag is people costs, which I will address below.

Revenue Per Attorney: The $300,000 to $350,000 Benchmark

For law firms that bill on a flat fee or hourly basis, there is a useful ratio that connects to the rule of thirds.

Take the firm's total fee income, not including client cost reimbursements, and divide by the number of attorneys. For this firm, dividing $3.6 million in fee income by eleven attorneys produces approximately $333,000 per attorney.

My benchmark is $300,000 to $350,000 in a moderate cost of living area. Lower cost areas might accept $250,000. Higher cost areas, such as major metro markets, may need to target $500,000 or more. The number is not about what you pay attorneys. It is about whether each attorney is generating enough revenue to cover their own cost, contribute a share toward firm overhead, and leave something for the owner.

This firm is right in the healthy range. Contingency fee firms are excluded from this calculation since their revenue patterns are different.

Client Costs: The Lines That Raised Questions

This P&L separates two income lines: fees earned and client costs repaid. I like this structure. It tells me how much of total revenue was truly earned for services rendered versus simply passed through from costs the firm paid on behalf of clients.

What caught my attention: in 2024, the firm paid out $155,000 in client hard costs but only recovered $13,000 in client cost reimbursements. In 2025, it paid out $52,000 and recovered $83,000. The 2024 numbers do not add up without an explanation.

There are a few possibilities. The firm may have billed and recovered a large portion of 2023 costs in 2024, leaving little to recover from 2024 spending. Some of the $155,000 may have been billed in late 2024 and collected in 2025, which would explain why 2025 recovery looks higher than 2025 spending. Or the firm may simply not be tracking case costs carefully enough to bill them back consistently.

The practical consideration: recovering case costs is worth the effort when the cost of the work involved is low, such as when a receptionist handles it during available time. It is not worth the effort when a paralegal who could be doing billable work has to trace costs across dozens of matters to recover a few hundred dollars.

I would also recommend using the cost of goods sold section in QuickBooks to capture case costs separately, creating a gross profit line that strips out client cost activity and shows what the firm actually earned for services rendered.

People Costs: The Biggest Issue on This P&L

The single most significant concern I flagged was the payroll ratio.

Wages alone represent approximately 60% of total revenue on this P&L. That is before adding contract labor or employee benefits, both of which appear as separate line items and push the true people cost ratio well above 60%.

My rule of thirds target is 33%. When people costs climb above 50% of revenue, it becomes very difficult to generate meaningful profit regardless of how disciplined the firm is on every other expense. You are starting too far behind.

I am not suggesting the attorneys or staff are overpaid. The issue is structural. Either the firm has more people than its current revenue can comfortably support, or rates need to increase to bring revenue in line with the cost of the team.

I also flagged the organization of the payroll section. Contract labor is listed separately from payroll expenses, which makes it difficult to see the true total people cost at a glance. I would recommend creating a single people costs section that includes wages, payroll taxes, employee benefits, and contract labor, with a clear subtotal. One number, no calculator needed.

For S corporations specifically, officer wages and employee wages should also be separated, since they appear on different lines of the S corp tax return and keeping them distinct in the books saves time and questions at tax time.

The S Corp Health Insurance Issue

This is a deduction that gets missed more often than most law firm owners realize.

For an S corporation owner, health insurance premiums paid by the firm must be added to the owner's wages in box one of their W-2 at year end. If this is done correctly, the insurance expense on the P&L nets to zero because it flows through compensation. The deduction then shows up on the owner's personal tax return.

If the health insurance expense sits on the P&L without being moved to wages before the final paycheck of the year, the deduction is likely missed entirely. Based on the structure of this P&L, I suspect that is what happened. Depending on the owner's effective tax rate, this could represent several thousand dollars in unnecessary tax paid.

This is worth bringing to the attention of both the bookkeeper and the tax preparer before the next filing.

Advertising and Marketing: I Need More Information

The firm spent $740 on advertising and marketing in 2024 on $3.5 million in revenue. In 2025, that increased to $8,300.

The 2024 number is remarkably low for a firm this size. There may be a good explanation, such as a rainmaker attorney who brought a substantial book of business with them and made paid advertising unnecessary. But I would want to know.

More importantly, $8,300 listed as a single line item for advertising and marketing tells me almost nothing useful. Is it Google Ads? Facebook? A billboard? Event sponsorships? Branded merchandise? Without knowing the channel, I cannot evaluate whether the spend is working.

My recommendation is to create a sub-account for each meaningful marketing channel so the total breaks down automatically in every report. If the firm's marketing team is already tracking this in a separate report and bringing it to ownership regularly, that is acceptable, but it should still flow through the books in a way that is searchable and auditable.

The question I would always ask about any advertising and marketing spend: how much revenue can you attribute to it? If you cannot answer that, the spend may need to be reconsidered.

Other Items I Flagged

Merchant Fees

At 2.65% of revenue, this firm's merchant fee rate is healthy. I do not recommend billing merchant fees as a separate line item on client invoices. The psychological impact of seeing a fee added after a quoted rate creates friction that is not worth the recovered amount. A better approach is to build the cost into billing rates. Raising all rates by 5% covers the 3% fee on a higher base and nets the firm more revenue than it would recover by itemizing fees separately.

Meals Deductibility

Meals have three tax treatment categories worth separating in the books. Employee meals during required meetings or training brought into the office are 100% deductible. Client meals and networking meals are 50% deductible. Office social meals, such as a Friday pizza order, are not deductible. Starting in 2026, snacks purchased for the office also lose their deductibility. Separating these in QuickBooks saves time at tax season and makes the deductible amounts clear.

Missing Insurance Lines

I did not see workers' compensation insurance or general liability insurance as clearly identified line items. Given that this firm has an office and a staff of up to twenty people, both should exist. They may be embedded in another line item, but they should be visible and separately identified in the books.

Grouped Expenses That Should Be Consolidated

Several expense categories are split across multiple accounts that belong together. Courier expense, postage, and shipping and freight should be grouped under one heading. Hotels, mileage reimbursements, parking, and travel should be grouped under occupancy costs or travel costs. Rent, utilities, and telephone are all occupancy-related and read more clearly as a group. This is not about changing amounts. It is about making the P&L readable without reaching for a calculator.

Inactive Accounts

The P&L includes at least one account with no activity in either year. In QuickBooks, these can be made inactive so they no longer appear on reports. Empty lines add visual noise without adding information.

Software Subscriptions

Software spend increased approximately 60% year over year. The dollar amount is not alarming, but the increase warrants a conversation. Did the firm adopt a new case management or document management system? Did an annual payment land in 2025 that covered months into 2026? Understanding the cause helps determine whether the new level is the ongoing run rate or a one-time spike.

What Would 30% Profit Have Looked Like?

Had this firm hit my 30% target for net income in 2025, the owner would have had approximately $1.1 million available rather than $835,000.

The gap is $265,000. That is not a small number. It represents the difference between a firm that is performing well and a firm that is performing at its potential.

The changes that would close most of that gap are not dramatic. Bringing payroll costs toward 33% of revenue, recovering more case costs from clients, and ensuring the S corp health insurance deduction is handled correctly would each make a meaningful contribution without requiring significant new investment or revenue growth.

Want Me to Review Your P&L?

This is something I have wanted to do on the podcast for a long time. If this episode was useful and you would like me to walk through your firm's profit and loss statement on a future episode, here is how it works:

• Send your P&L to: podcast@profitscalethrive.com

• It is completely free

• I will anonymize all identifying information before anything goes public ... firm name, account descriptions, any details that could identify the firm or the owner

• You will receive a full walkthrough before the episode is published

The only condition is the same one I set with this firm: I need to be able to use it as a podcast episode. If that works for you, I would love to hear from you.

Frequently Asked Questions

What is the rule of thirds for a law firm P&L?

The rule of thirds is a profitability framework for professional services firms. It holds that revenue should be divided roughly into three equal portions: one third for people costs including wages, benefits, payroll taxes, and contract labor; one third for overhead including rent, software, insurance, and marketing; and one third for owner profit. When any one category significantly exceeds its third, it creates pressure on the others and makes consistent profitability difficult to achieve.

What is a healthy net income percentage for a law firm?

A reasonable target for most law firms billing on flat fee or hourly rates is 30% net income as a percentage of revenue. This means that for every dollar of revenue, thirty cents flows to the owner as profit or for reinvestment. Many firms operate in the 15% to 25% range. Firms below 10% are typically experiencing structural issues with people costs, pricing, or both.

What does revenue per attorney mean and why does it matter?

Revenue per attorney is calculated by dividing total fee income by the number of attorneys at the firm. It measures whether each attorney is generating enough revenue to cover their compensation, contribute to firm overhead, and produce profit for the owner. In moderate cost of living areas, a healthy target is $300,000 to $350,000 per attorney. When this number falls below $250,000, profitability becomes difficult to sustain regardless of expense management.

How should an S corp owner handle health insurance on the firm's P&L?

Health insurance premiums paid by an S corporation for the owner must be added to the owner's W-2 gross wages in box one at year end. When this is done correctly, the expense on the P&L nets to zero because the cost flows through as compensation. The deduction then appears on the owner's personal tax return. If the expense remains on the P&L without being moved to wages, the deduction is likely missed entirely and the owner overpays taxes as a result.

Should law firms bill merchant fees as a separate line item on client invoices?

Most fractional CFOs, including Kelley, advise against it. Itemizing a fee after a quoted rate creates a negative psychological experience for the client that is disproportionate to the dollar amount recovered. A better approach is to build the expected merchant fee cost into billing rates. Raising all rates by 5% covers a 3% fee on a higher base and typically produces more net revenue than itemizing the fee separately while keeping the client experience cleaner.

Related Reading on Your Profitable Law Firm

If this episode connected with where your firm is right now, these posts go deeper on related topics:

• How Law Firms Stay Profitable and Resilient When the Market Feels Unpredictable

• Why Your Law Firm Needs CFO-Level Thinking, Not Just a Bookkeeper With Natalia Zacharin

• Tax Planning, Business Structure, and Wealth Strategy for Law Firm Owners | Mike Milligan CFP