Professional services
Law Practice Profit Margin Calculator
Works practice margin, where the chain from recorded time to profit is where it goes.
Result
Markup is measured against your cost, margin against the price you charge. A 50% markup is a 33.3% margin, not a 50% one. Pricing off the wrong one is the most common way a job that looked profitable turns out not to have been. Gross profit is what is left after the cost of doing the job. Overhead comes out of that: the building, the office wages, the vans, insurance, software and advertising. A healthy gross margin still loses money if overhead is larger.
Get a Free Business AuditHow the calculation works
Profit as a percentage of revenue, with the components shown. The useful way to read margin in a time-based practice is as the end of a chain: hours recorded, hours billed after realisation, amounts collected, then costs and overhead. Each stage removes a share, and knowing which stage loses the most tells you where to work.
What moves the number
- Realisation and collection, which come before any cost question.
- Overhead per billable hour.
- Owner compensation and where it sits.
- Delegation, which changes the cost of each billed hour.
Where this one goes wrong
A practice with a thin margin usually finds the loss in realisation and collection rather than in costs, and that is good news because both are addressable without working more hours or spending less. Check them before reviewing expenses. Owner compensation remains the convention question: state whether it is above or below the line, because the same practice reports very different margins depending on the answer and comparisons without that stated are worthless.
Before you quote
- Check realisation and collection before reviewing costs.
- State where owner compensation sits.
- Track margin by matter type as well as overall.
Questions
About this calculator
Where does law practice margin usually leak?
Realisation and collection, before any cost question arises. That is encouraging, because both are addressable without working more hours or cutting spending, and most practices look at expenses first and find little there.
Does owner compensation belong above the line?
For the figure to be meaningful, yes, at a market rate for the work actually done. Both conventions exist and the same practice reports very different margins depending on which is used, so any comparison has to state it explicitly.
Should margin be measured by matter type?
Yes, because types differ enough that the overall figure describes no part of the practice accurately. It is also the measurement that most often changes behaviour, since it identifies the work that has been subsidising the rest.
The formula
margin = (price - cost) / price; markup = (price - cost) / cost
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How to use this calculator
- Price charged ($). Enter your own figure; the page starts at $2,600.
- Direct cost ($). Enter your own figure; the page starts at $1,100.
The result updates as you type, so you can try a figure, see what it does to gross margin, and change it back. Nothing you enter is sent anywhere or saved.
A worked example
These are the figures the calculator opens with. Every number in the results column below is produced by the same calculation the page runs, so you can follow it through before putting your own figures in.
What goes in
| Input | Value |
|---|---|
| Price charged | $2,600 |
| Direct cost | $1,100 |
What comes out
| Result | Value |
|---|---|
| Gross margin main result | 57.7% |
| Gross profit | $1,500 |
| Same thing as a markup | 136% |
That job earns $1,500 of gross profit, a 57.7% margin. The same job described as a markup is 136%.
How sensitive the answer is
Holding everything else steady and changing only price charged, this is what happens to gross margin. It is worth knowing which of your inputs the answer actually hinges on, and which barely move it.
| Price charged ($) | Gross margin |
|---|---|
| $1,300 | 15.4% |
| $1,950 | 43.6% |
| $2,600 example above | 57.7% |
| $3,900 | 71.8% |
| $5,200 | 78.8% |
Every other input is held at the example value while this one changes, which is not how a real job behaves. Treat it as a guide to which number matters most, not as five separate quotes.
What each figure means
- Price charged ($)
- A money amount, starting at $2,600.
- Direct cost ($)
- A money amount, starting at $1,100.
What the results tell you
| Result | What it is |
|---|---|
| Gross margin | The headline result. A percentage. |
| Gross profit | A money figure. |
| Same thing as a markup | A percentage. |
Estimating is the easy part
The jobs you never hear about cost more than the ones you mis-measure. BDEVY builds the marketing, systems and automation that bring them in.