Most partners were taught to manage by hours: billable pace, utilization, realization, and whether the team “stayed busy.” But hours are only an input. A Matter P&L is the output: what the matter actually produced after you account for what it consumed.
At Bennett Financials, I see this exact pattern in US-based businesses where CFO-level visibility changes the quality of decisions.
If you want matter profitability you can scale, you need to read a Matter P&L the way a CFO reads a product line P&L: contribution first, allocation second, and decisions tied to the next 30–90 days.
Key Takeaways
A Matter P&L turns partner conversations from “Who’s busy?” to “What’s paying for the firm?” It shows which matters deserve more capacity, which need a scope reset, and which should be re-priced or declined.
Matter profitability is your ability to consistently convert legal work into margin and cash, not just billed time.
Matter profitability is the practice of measuring each matter’s revenue minus the true costs to deliver it, so partners can make smarter decisions on pricing, staffing, scope, and collections. It’s for managing partners, practice leaders, and matter owners who want predictable margin. You track billed and collected revenue, realization and write-downs, direct labor and vendor costs, and a consistent overhead allocation. Review weekly for active matters and monthly for trend decisions, with standard matter codes, clean time entries, and a repeatable allocation method.
Best Practice Summary
- Build a single Matter P&L view that shows billed, collected, write-downs, and margin in one place.
- Separate direct costs (attorney time, paralegal time, vendors) from allocated overhead (rent, admin, tools).
- Standardize matter codes and task codes so you can compare like-for-like work.
- Review active matter margin weekly; make pricing, staffing, and scope decisions monthly.
- Use a simple red/yellow/green rule so partners act on the same signals, not opinions.
- Treat collections and WIP aging as profitability metrics, not “finance problems.”
What is a Matter P&L?
A Matter P&L is a job-costing income statement for one matter: revenue in, costs out, margin left. It answers one question partners care about but rarely see clearly: “Did this matter earn its keep?” (law.cornell.edu)
Unlike firm-wide financials, it forces visibility on the unit economics of legal work: which matter types create profit, which create work, and which quietly drain capacity.
Why do hours lie about profitability?
Hours can look “healthy” while margin is collapsing, because time tracks effort—not economics. A matter can hit the hours target and still be unprofitable if you’re discounting, writing down, over-staffing, eating scope, or collecting late.
The moment you shift from “hours delivered” to “margin and cash produced,” partner behavior changes: staffing gets tighter, scope gets clearer, and pricing becomes a strategy conversation instead of a negotiation habit.
Terminology
Matter P&L: A matter-level income statement showing revenue, costs, and margin for one client matter.
Realization: The percentage of worked value that becomes billed and collected revenue after write-downs and discounts.
Effective rate: Collected revenue divided by total attorney/paralegal hours worked on the matter.
Direct costs: Costs you can tie to the matter (time cost, filing fees, expert fees, contractors).
Allocated overhead: Indirect costs spread across matters (admin, rent, tools) using a consistent method.
Contribution margin: Revenue minus direct costs; the margin that funds overhead and partner profit.
WIP: Work in progress—time and costs incurred but not yet billed.
AR aging: How long invoices sit unpaid; a cash-flow signal, not just a collections metric.
How to read a matter P&L without getting tricked by hours
Start with contribution margin, then add overhead allocation as a secondary lens. If contribution is weak, overhead debates won’t save you; you have a pricing, staffing, or scope problem.
Here’s the CFO reading order I want partners to use:
- Revenue quality (billed vs collected)
- Write-downs and discounts (why they happened)
- Direct labor cost (time cost, not bill rate)
- Direct out-of-pocket costs (vendors, experts, filing fees)
- Contribution margin (is the work inherently profitable?)
- Overhead allocation (does it still carry its share of the firm?)
- Cash timing (WIP aging + AR aging)
Matter P&L reading map
| Matter P&L line | What it really tells you | Partner decision it should trigger |
|---|---|---|
| Billed revenue vs collected revenue | Whether the matter is producing cash, not just invoices | Tighten billing cadence, fix invoice friction, reset expectations |
| Write-downs/discounts | Where scope, staffing, or pricing is breaking | Change engagement terms, task staffing, or pricing model |
| Direct labor cost | Whether you’re over-staffing or mis-leveling work | Shift work to the right level, redesign the workflow |
| Vendor/out-of-pocket costs | Whether third-party spend is controlled and recoverable | Negotiate vendor terms, confirm pass-through, update budgets |
| Contribution margin | Whether the matter can fund overhead and profit | Expand, standardize, or stop this matter type |
| Overhead allocation | Whether it truly supports the firm’s cost structure | Reprice, redesign delivery, or narrow client fit |
What costs should be included in a Matter P&L?
Include every cost that changes when the matter changes. That’s the CFO test: if the matter didn’t exist, would we still incur the cost?
Start with two buckets:
Direct costs (matter-driven)
- Attorney and paralegal time at fully loaded cost (salary + payroll taxes + benefits)
- Contract attorneys and freelancers
- Expert witnesses, court reporters, filing services
- Travel that’s matter-specific
- Any pass-through costs you choose not to mark up (make that policy explicit)
Allocated overhead (firm-driven)
- Admin and operations team
- Office and occupancy
- Core tools and subscriptions
- Insurance, marketing, leadership time (allocated carefully)
From a tax standpoint, firms still need to distinguish ordinary and necessary business expenses, capitalizable costs, and costs of services, but that’s a separate lens from managerial profitability. This is educational content, not legal or tax advice—coordinate with your CPA and counsel for compliance. (IRS, Publication 535) (IRS)
Matter P&L allocation methodology: what to allocate vs what to ignore
Allocate overhead only after you’ve validated contribution margin.
A practical, defensible starting point for partners is a two-step allocation:
Step 1: Allocate “delivery overhead” tied to producing work (paralegal management, practice support, shared production tools).
Step 2: Allocate “firm overhead” tied to running the business (admin, occupancy, baseline tech).
Keep the method stable for at least a quarter. If you change allocation rules every month, partners will stop trusting the report.
Matter-level profitability analysis for fixed-fee and subscription work
Fixed-fee work becomes profitable when you manage variance: scope control, workflow design, and staffing level. Subscription work becomes profitable when you control utilization inside the bundle and enforce what’s in/out of plan.
The key is to separate “revenue recognition” from “cash reality.” You can be technically earning revenue while cash lags behind, and that gap matters for staffing decisions. The accounting standard emphasizes representing the nature and timing of revenue from contracts with customers; partners still need a managerial view that ties revenue to delivery cost and cash timing. (FASB, ASC 606) (FASB)
Practical moves that usually matter more than debating the fee amount:
- Build a standard scope checklist and a “change order” trigger.
- Define who does what (partner vs associate vs paralegal) before work begins.
- Track variance weekly: hours-to-budget, write-down trend, WIP age.
How often should partners review matter profitability?
Weekly review for active matters prevents profit leaks; monthly review shapes staffing, pricing, and client strategy. If you only look at matter results at close-out, you’re auditing history—not managing performance.
Law firm matter profitability report cadence partners can actually keep
Weekly (15 minutes per matter owner)
- WIP aging (what’s stuck)
- AR aging (what’s late)
- Any variance vs budgeted time/cost
- One action: bill, re-scope, re-staff, or escalate collection
Monthly (practice-level)
- Top 10 profitable matter types
- Bottom 10 profit-draining matter types
- Repeat drivers of write-downs
- Capacity plan for the next 30–90 days
Rising costs are the environment most firms are operating in right now, which makes cadence more—not less—important. (Federal Reserve, 2024 Small Business Credit Survey) (Federal Reserve Bank of Kansas City)
KPIs partners should track beyond realization
Realization is a symptom. Matter profitability is the system.
KPIs that usually change partner decisions fastest:
- Contribution margin per matter and per matter type
- Effective rate (collected revenue ÷ hours worked)
- Write-down rate (dollars written down ÷ standard value)
- Staffing mix (partner/associate/paralegal cost ratio)
- WIP aging (days since last billable progress or invoice event)
- AR days and % over 60/90 days
- Cash conversion cycle for the matter: time worked → billed → collected
- Vendor cost recovery rate (what % is passed through and collected)
Labor is typically the dominant cost in professional services, so small changes in staffing mix can swing margin more than partners expect. (BLS, Industry at a Glance: Professional and Business Services) (Bureau of Labor Statistics)
Decision framework: when to greenlight, renegotiate, or exit a matter
Use a simple red/yellow/green decision rule so partners act consistently.
Green (keep scaling this work)
- Contribution margin is strong and stable
- Write-downs are occasional and explainable
- WIP and AR are controlled
Yellow (renegotiate or redesign delivery)
- Contribution margin is inconsistent, but salvageable
- Write-downs repeat for the same reason (scope, staffing, client behavior)
- AR drift is increasing
Red (stop, reprice hard, or decline future work like it)
- Contribution margin is weak even before overhead allocation
- Write-downs are structural (the work is underpriced or undeliverable at current scope)
- AR is chronically late, creating cash strain and partner time loss
If you want a scoring approach, keep it lightweight:
Score each matter 0–2 on: contribution margin, write-down trend, WIP age, AR age, staffing mix discipline.
- 8–10 = Green
- 5–7 = Yellow
- 0–4 = Red
The point isn’t precision. The point is a repeatable partner conversation.
Quick-Start Checklist
- Pick one practice group and run Matter P&Ls for the last 30–60 closed matters.
- Define the “direct labor cost” rate for each role (fully loaded, not bill rate).
- Standardize matter categories so comparisons mean something.
- Add three required fields to time entries: task code, phase, and staffing level.
- Create one overhead allocation method and freeze it for 90 days.
- Set weekly and monthly review cadences (and stick to them).
- Require one decision outcome per review: staff, scope, price, or collections action.
Case Study: Virtual Counsel—profit visibility that kept growth sustainable
When @VirtualCounsel was growing, expenses were growing faster than revenue, putting profitability and long-term stability at risk. Bennett started with a deep financial review to diagnose the root cause, then implemented a targeted, structured asset-based tax plan tied to their business model, paired with ongoing CFO-level advisory support as they scaled. The documented results included 94% revenue growth in 2022 (since starting in 2021), a 401% profit increase, and a $87,966 tax liability legally converted into a refund.
Why this matters for partners: you can’t outgrow weak unit economics. Whether you call it “matter profitability” or “service-line profitability,” the mechanism is the same—visibility turns vague growth into controlled, profitable growth.
Common mistakes partners make with Matter P&Ls
Treating allocated overhead as the main argument. Contribution margin is the lead domino; allocation is the second domino.
Using “standard rates” as a proxy for profit. If the matter discounts, writes down, or collects late, the effective rate is what matters.
Ignoring trust and client funds mechanics. Client funds must be held separate from the firm’s property, and that separation affects cash visibility and reporting hygiene. (ABA, Model Rule 1.15) (American Bar Association)
Reviewing too late. If the first time you see margin is after the matter closes, you’ve already paid the price.
When to hire a fractional CFO
Hire fractional CFO support when you have enough volume that decisions repeat—and the cost of being wrong is now meaningful.
Common “yes, it’s time” signals:
- Partners can’t explain which matter types are truly profitable without guessing.
- Staffing decisions are driven by availability, not margin.
- Write-downs feel normal, not alarming.
- Cash is tight even when billed revenue looks strong.
- You need one reporting language across partners, ops, and finance.
If you want help building Matter P&Ls that partners actually use, our outsourced CFO leadership work is designed around decision-grade reporting—profitability, cash flow, and accountability.
The Bottom Line
- Make contribution margin the first partner lens; treat overhead allocation as the second lens.
- Run weekly matter reviews for active work and monthly reviews for practice trends.
- Track effective rate, write-downs, staffing mix, WIP aging, and AR aging—not just hours.
- Use a red/yellow/green rule so partners act consistently and quickly.
- Build a repeatable Matter P&L system that ties pricing, staffing, and collections to margin.
Book a CFO consult with Bennett Financials if you want a clean Matter P&L model, a review cadence partners will keep, and decision rules that protect margin without adding reporting noise.
