Financial Performance Analysis of a Small Law Firm

Anderson Soares Sutero; Isabela Romanha de Alcantara

DOI: 10.22167/2675-6528-202602653

Article derived from a Course Conclusion Work (TCC), with content based on the student’s original work and adapted to the editorial format of the E&S Magazine with the support of the ResumeAI tool, an artificial intelligence solution developed by Instituto Pecege for textual synthesis and organization.

Summary

Efficient financial management is an essential strategic pillar for the sustainability and competitiveness of law firms, especially in the micro and small business segment. The objective of the present study was to analyze the financial performance of a small law firm, aiming to identify economic-financial fragilities. The research was characterized as a case study with a quantitative approach and descriptive objective, based on documentary analysis of internal records for the year 2025. The methodology included the structuring of the Income Statement (DRE) and Cash Flow Statement, and the Balance Sheet, allowing the application of profitability, capital structure, and solvency indicators according to current accounting standards. The results indicated a profitability of 77.75% and an operating margin of 78.08%, demonstrating high technical efficiency in service delivery. However, horizontal analysis identified significant volatility in monthly revenues, with billing peaks concentrated in months of success fee and contingency fee settlements. Additionally, immediate liquidity indices of 4.66 and current liquidity of 26.96 indicated high solvency, although the concentration of resources in advances to partners required monitoring. It was also identified that the high volume of reimbursements to clients (R$ 910,697.13 in the year) required rigorous segregated controls. It was concluded that, despite robust profitability, the long-term sustainability of the business depended on the formalization of financial processes, the creation of working capital reserves, and portfolio diversification to mitigate the risks of legal seasonality.

Keywords: Case Study; Law Firm; Financial Management; Performance Indicators.

1. Introduction

The services sector plays a central role in the Brazilian economy, contributing significantly to the Gross Domestic Product (GDP) and job creation. In 2023, this segment accounted for approximately 70.4% of the GDP and about 60% of formal jobs in the country, according to data from the Brazilian Institute of Geography and Statistics (IBGE, 2025). Its relevance stems from its diversity, encompassing areas from professional, legal, and accounting services to health, education, information technology, and tourism.

The recent dynamics of the services sector demonstrate a consistent recovery after the COVID-19 pandemic period. In May 2025, the total volume of services reached a level 17.5% higher than the pre-pandemic level of February 2020, driven by the digitalization of processes and the expansion of demand in segments with higher added value (IBGE, 2025). This performance reinforces the need for structured management practices in highly competitive sectors, such as the legal sector, which follows this expansion.

In this scenario, the professionalization of financial management in law firms is configured as an essential strategic factor for organizational sustainability and competitiveness (Assaf Neto, 2020; Gitman, 2001; SEBRAE, 2024). However, Micro and Small Enterprises (MSEs) still face structural obstacles in financial management. The Brazilian Micro and Small Business Support Service (SEBRAE, 2024) indicates that about 60% of Brazilian MSEs have difficulties in cost control, cash flow forecasting, and service pricing.

Small law firms are not immune to this reality, replicating the economic-financial management challenges of SMEs. The absence of systematized practices limits planning capacity, reduces budgetary predictability, and compromises economic stability. These effects are aggravated by relevant fixed costs, prolonged collection cycles, and a high rate of Nonpayment, directly impacting liquidity and profitability (Assaf Neto, 2020; Gitman, 2001).

Financial performance analysis thus emerges as a crucial tool for diagnosing the economic health of a firm. Groups of indicators such as cost efficiency, operational balance, liquidity, and profitability allow for an objective assessment of the business’s capacity to generate results, sustain its operations, and honor short- and long-term commitments (Gitman, 2001; Assaf Neto, 2020). This analysis transforms administrative management into measurable results, providing subsidies for planning, control, and managerial decision-making.

Law practice, in particular, faces the challenge of reconciling technical excellence with financial sustainability, especially in small firms operating under pressure from high fixed costs. Financial management becomes an essential condition for the survival and growth of the business, demanding continuous analysis for price adjustments and resource reallocation (SEBRAE, 2024; Assaf Neto, 2020; Gitman, 2001; Marion, 2018). Despite advances in the literature on management and controlling in services, there is a practical and theoretical gap regarding the structured application of financial analysis in small law firms.

This lack of empirical approaches focused on the legal context highlights the need for research that combines the rigor of financial analysis with the applied nature of service management. In the specific context of the unit object of this study, the research is justified by the historical absence of a formal and systematic financial analysis, where decision-making was predominantly based on intuition rather than technical indicators. The need for this diagnosis emerged during alignment meetings that identified weaknesses in current controls, motivating the implementation of a management system (ERP) to organize information and enable real performance monitoring. Furthermore, the researcher’s role as the company’s financial manager facilitates the execution of action research, aimed at transforming raw data into strategic tools for business sustainability. Given this scenario, the objective of this work was to conduct an analysis of the financial performance of a small law firm, aiming to identify economic-financial weaknesses.

2. Material and Methods

The present study was characterized as a research of an applied nature, with a quantitative methodological approach, according to the guidelines of Gil (2019). The choice of the quantitative approach was justified by the need to translate information into numbers, allowing for the objective classification and analysis of the data collected through statistical resources and techniques. Regarding the objectives, the research was descriptive in nature, seeking to characterize the economic-financial performance of the unit of analysis over a defined period, without the intention of establishing causal relationships (Gil, 2019).

The research strategy adopted was the case study, which enabled an in-depth analysis of the selected unit from multiple sources of evidence. The empirical object was a small law firm, established in 2011 and consolidated as a partnership in 2014. Its practice focuses on the areas of Labor Law, Social Security Law, and Civil Law in the Greater São Paulo region, providing services to individuals and legal entities, in addition to acting as a legal correspondent for other firms.

The operational structure of the office is composed of partners, attorneys/lawyers, assistants, and interns, complemented by a network of external partners and specialists, such as experts and consultants, engaged according to the nature and complexity of the demands. The selection of this unit of analysis was justified by the opportunity to observe, in practice, the challenges faced by legal managers who frequently prioritize the core business activity over systematized financial and managerial controls.

Data collection was carried out in specific stages. Firstly, regarding ethical aspects, a Term of Agreement was obtained from the law firm, formalizing the authorization for access and use of internal financial data strictly for academic purposes. This procedure ensured the protection and confidentiality of the company’s sensitive information, guaranteeing research ethics and the anonymity of the institution and individuals involved, with aggregated and confidential data processing.

Additionally, unstructured interviews were conducted weekly with the company owner. These dialogues aimed to validate the scope of data collection and monitor the evolution of indicator calculation. As this is an action-research project, in which the researcher acted as the unit’s financial manager, the interviews served as a basis for the qualitative interpretation of the observed phenomena and the alignment between the extracted data and the operational reality.

The collection of financial data occurred from internal records and the office management system, the ERP Conta Azul. The information covered the period from January to December 2025. The choice of this temporal scope was justified by the availability and integrity of the data, as the ERP system reached its full operation and systemic organization starting in January 2025, ensuring the reliability of the dataset.

The collected data included cash flow spreadsheets, balance sheet, fee income controls, cost records, and the Income Statement (DRE). For the organization of the Balance Sheet and the classification of accounts, the accounting criteria described by Ribeiro (2017) were adopted. The asset elements were arranged in descending order of liquidity, and the liabilities in the balance sheet followed the order of exigibility, aiming to more accurately reflect the entity’s solvency and financial health in the short and long term.

The structuring of the office’s assets comprised two main classes. Current assets included cash and cash equivalents, such as bank transactions and immediate liquidity financial investments; customer accounts, such as accounts receivable, reimbursements, and transfers; and other credits, which encompassed notes receivable and advances to partners. Non-current assets consisted of fixed assets, such as furniture and fixtures, and their respective depreciations and amortizations.

For liabilities, the classes of current liabilities and net worth were defined. Current liabilities encompassed obligations to suppliers, taxes to be collected, labor and social security charges, and other operational obligations. Net worth grouped the subscribed share capital and the balance of accumulated profits or losses, representing the resources invested by partners and the result generated by operations.

Financial performance analysis was used to measure the office’s ability to generate results and operational efficiency, using economic-financial indicators, according to Gitman (2001) and Assaf Neto (2020). These indicators are fundamental for analyzing the profitability, cost structure, and operational balance of companies, allowing for a quantitative interpretation of performance over time.

The analysis of the Income statement for the year (DRE) was carried out through vertical and horizontal examinations of its components, such as Net Revenue, Cost of Services Rendered, and Operating Expenses. This approach, according to Iudícibus (2017), allowed for an understanding of the percentage composition of results and the temporal variations that impacted financial performance, following the precepts of Assaf Neto (2020) to ensure the reliability of profitability ratios.

The analysis was conducted comparatively, month by month, and consolidated for the total period, aiming to describe the economic-financial performance of the office. The financial indicators selected to support the evaluation of the office’s economic-financial performance were segmented into three main categories: profitability, liquidity, and equity structure.

In the profitability group, Profitability and Operating Margin were analyzed. Profitability was calculated as the percentage of net profit obtained on total revenue, measuring the organization’s ability to generate return after deducting all expenses and taxes (Assaf Neto, 2020). The Operating Margin indicated the management’s efficiency in administering costs and expenses directly linked to the main activity, reflecting the profit obtained before financial expenses and taxes (Marion, 2018).

For the liquidity assessment, the Current Liquidity and Immediate Liquidity ratios were used. Current Liquidity was calculated by the ratio between current assets and current liabilities, indicating the organization’s short-term payment capacity. The Quick Ratio was not considered, since, in the provision of legal services, inventory is non-existent, making its application redundant for this analysis.

Immediate Liquidity was determined by the ratio between cash and current liabilities, reflecting the instantaneous financial availability (cash and bank balances) against short-term debts. Regarding the equity structure, Net Working Capital (NWC), calculated as current assets minus current liabilities, and the Third-Party Capital Participation (TPCP), which measured the proportion of current and non-current liabilities in relation to net equity, were examined.

3. Results and Discussion

The financial performance analysis of the small law firm, for the fiscal year 2025, revealed a scenario of robustness in terms of profitability, but also exposed structural and operational fragilities that demand managerial attention. The balance sheet data indicated a solid equity base, with a Net Worth of R$ 571,796.75 and Current Liabilities of only R$ 21,911.23. This configuration suggests low short-term indebtedness, which, at first glance, confers an image of financial stability to the organization, according to the principles of balanced Wealth Management.

Regarding liquidity indicators, the research identified a current ratio of 26.96 and a quick ratio of 4.66. The current ratio, which represents the firm’s ability to cover its short-term debts, showed that for every R$1.00 of debt, the organization had R$26.96 in financial assets. This level is significantly higher than the average observed in industry case studies, such as the ratios of 6.99 and 4.47 reported by Fundace/USP, and far exceeds the range considered healthy by general financial literature, which varies between 1.5 and 2.0 (XP Investimentos; Stripe).

Despite high liquidity ratios, a more in-depth analysis of the Current Asset composition revealed a significant fragility. It was found that R$ 394,370.33, corresponding to 66.7% of the Current Asset, were allocated to advances to partners. This concentration of resources, although formally part of the asset, has in practice moved out of the firm’s operational flow into the partners’ private sphere. As highlighted by Ribeiro (2017), assets without a predictable cash conversion flow can compromise the entity’s real solvency in times of crisis, creating a false sense of asset security and limiting the operational liquidity available for investment or expansion.

The participation of third-party capital in the firm’s financing was 3.83%, reinforcing the finding that most operations are sustained by equity. This low dependence on third-party debt contributes to the balance sheet’s solidity, but the management of advances to partners emerges as a critical point. The absence of effective cash flow for these resources may ultimately force the firm to seek external credit to cover working capital needs, even with a formally high net worth, which contradicts the logic of prudent financial management.

The consolidated Income statement for the year (DRE) for 2025, calculated based on a Net Operating Revenue (ROL) of R$ 784,763.50 (after deduction of Simples Nacional taxes from Gross Revenue of R$ 861,436.64), presented notable profitability indicators. Profitability (net margin) was 77.75%, indicating that for every R$ 100.00 of net revenue, the firm converted approximately R$ 77.75 into Net profit. This level is considered high for the legal services sector, signaling a well-controlled cost structure and high intellectual value addition in the services provided.

Additionally, the operating margin was 78.08%. The small difference between profitability and operating margin shows that financial expenses and non-operating items had a minimal impact on the final result. This reinforces the conclusion that the office’s economic performance is mostly sustained by the efficiency of its core activity, namely, the provision of legal services. The consistency of these profitability indicators underlines the business’s ability to generate positive results and maintain a profitable operation, even in a competitive sector.

However, the analysis of the seasonality of revenue and net profit throughout 2025 revealed significant volatility. A direct relationship was observed between revenue volume and profit generation, suggesting a well-managed structure of variable and fixed costs. The peak in invoicing occurred in September, reaching R$ 113,197.69, accompanied by the highest monthly profit of R$ 89,979.00. In contrast, May recorded the lowest economic performance, with revenue of R$ 43,414.24 and a profit of R$ 12,910.05. This fluctuation is characteristic of the provision of legal services, where the receipt of contingency and statutory fees can generate significant variations in the monthly result.

This volatility exposes the fragility of a business model overly dependent on success fees. To mitigate these risks, the literature suggests implementing tools such as Prospective Cash Flow (Kassai, 1997), which allows simulating future scenarios and anticipating cash shortages. The establishment of a working capital reserve, using surpluses from peak months, is also crucial to cover fixed costs during downturns, ensuring solvency without the need for external credit. Diversifying revenue through recurring monthly advisory contracts (retainers) can reduce dependence on legal seasonality and stabilize Net Revenue, as pointed out by Ramírez-Urquidy et al. (2018) regarding the importance of planning for the sustainability of small businesses.

The Horizontal Analysis (HA) of invoicing confirmed significant volatility, with drops of -29.37% in March and -29.57% in May. May, with R$ 43,414.24, was the month with the lowest invoicing of the year. Recovery began in June, culminating in the September peak (R$ 113,197.69), which represented a growth of 105.32% compared to the previous month. This peak was driven by the simultaneous settlement of Contingency Fees (R$ 28,046.10) and Labor Fees (R$ 48,541.39), evidencing the concentration of receipts in specific events of the legal calendar.

The observed seasonality suggests that the second semester tends to concentrate the closing of procedural phases and the release of warrants, often resulting from actions initiated after periods of higher staff turnover at the beginning of the year. In October, revenue remained high at R$ 105,585.04, driven by an exceptional volume of Administrative Social Security Fees, which totaled R$ 65,669.60. This data highlights the importance of diversifying revenue sources for the firm’s financial stability, mitigating the impacts of fluctuations inherent in contentious litigation.

The Vertical Analysis (VA) of the monthly Gross Revenue, which detailed the composition of the cost structure and profit margin, highlighted the rigidity of the office’s fixed costs. In May, administrative expenses reached their peak representativeness, consuming 48.32% of gross revenue, which resulted in the lowest net margin of the year, at 34.06%. In contrast, in months of high productivity, such as September, administrative expenses represented only 9.58% of gross revenue, allowing the share allocated to net profit to expand to 80.43%. This behavior confirms the firm’s operational efficiency in periods of high volume, but also alerts to the need for contingency reserves for months of low collection.

In February, administrative expenses represented only 5.02% of revenue, a point of efficiency that maximized profit due to the increase in revenue not being accompanied by a proportional increase in fixed costs. However, in May, the drop in revenue caused the same administrative expenses to consume 48.32% of Net Operating Revenue (ROL), demonstrating that, in downturn scenarios, almost half of the collection is used for the maintenance of the basic structure. On average, administrative expenses remained between 15% and 20% of revenue throughout the year, indicating that the firm needs an average revenue of over R$ 50,000.00 to sustain its structure and allow for reinvestments and profit withdrawals by partners.

The high profitability of the firm, with an operating margin of 78.08%, is consistent with the intellectual nature of legal services, where human capital is the main input and fixed costs are relatively stable, according to Santos (2022). However, revenue fluctuation and dependence on contingency fees, as pointed out by Moura (2025), generate profit peaks that can mask periods of low collection, exposing the business to structural risks. The rigidity of the cost structure, where administrative expenses consume a significant portion of revenue in contraction scenarios, reflects the common administrative fragility of SMEs, often limited by low perception and prioritization of managerial problems (Kassai, 1997).

The analysis of Cash flow, focused on actual financial movement, revealed that the firm started the year 2025 with an available balance of R$ 105,478.25, maintaining positive balances in most months. A crucial aspect identified was the high volume of transfers to clients, which totaled R$ 910,697.13 in the annual accumulated. These amounts represent third-party funds, such as indemnities and permits, which pass through the firm’s accounts before being transferred to clients, not composing the Net Operating Revenue. In July 2025, there was a peak in transfers of R$ 200,817.28, highlighting the firm’s role as a financial intermediary in legal proceedings.

The significant volume of transfers to clients, which exceeded the company’s net revenue itself, imposes challenges that go beyond accounting techniques, entering into civil liability and professional ethics. The guidelines of the Brazilian Bar Association (OAB) and the principles of financial transparency require the absolute segregation between fees (own resources) and client funds (third-party resources). The absence of specific bank accounts for this purpose can distort the perception of real cash flow, leading managers to consider the bank balance inflated by transfers as available working capital (Brazil, 1994; OAB, 2015).

The need for implementing more sophisticated custody mechanisms is evident, including daily bank reconciliations and, preferably, the use of sub-accounts or transit accounts. This practice not only protects the partners’ assets against challenges of mismanagement of client funds but also ensures that the analysis of profitability indicators is performed on a clean database, reflecting the genuine operational performance of the firm without the interference of amounts that merely pass through accounting. Taxes (Simples Nacional – DAS) totaled R$ 76,673.14 for the year, and the analysis of outflows shows that, despite stable fixed operational costs, cash flow is strongly influenced by the transit of third-party funds, reinforcing the need for liquidity reserves to support operations without relying exclusively on short-term fees.

In summary, the study revealed that, although the law firm presents high profitability and operational efficiency, long-term sustainability is compromised by significant revenue volatility, dependence on contingency fees, and concentration of resources in partner advances that distort real liquidity. Financial management should therefore focus on formalizing processes, creating working capital reserves, and diversifying the client portfolio, in addition to implementing rigorous controls for third-party fund transfers, in order to mitigate the risks of legal seasonality and ensure a solid foundation for strategic decision-making.

4. Conclusion

The present study sought to analyze the financial performance of a small law firm, with the aim of identifying economic-financial weaknesses in its management. It was found that the operation demonstrated high profitability, with a net margin of 77.75% and an operating margin of 78.08%, indicating high technical efficiency in service delivery and cost control. However, significant volatility was observed in monthly revenues, driven by the concentration of success and contingency fees, which exposes the business to seasonality risks. Additionally, it was identified that, despite high current liquidity ratios of 26.96 and immediate liquidity of 4.66, the actual availability of resources was compromised by the high allocation to partner advances. The significant volume of client reimbursements, totaling R$ 910,697.13 for the year, necessitated rigorous segregated controls to prevent distortions in cash flow and the perception of liquidity.

The main contribution of this work lies in the detailed diagnosis of the office’s economic-financial health, transforming raw data into strategic information for managerial decision-making. The identified weaknesses, such as dependence on legal seasonality and liquidity distortion due to partner advances, limit long-term sustainability. As managerial recommendations, we suggest formalizing financial processes, creating working capital reserves, and diversifying the client portfolio, in addition to implementing more sophisticated custody mechanisms for third-party transfers. For future studies, we recommend analyzing return on investment indicators, deepening financial planning tactics to mitigate seasonality, and investigating the impact of management controls on the cost structure of small law firms.

Bibliographic References

Assaf Neto, A. 2020. Finanças Corporativas e Valor. 8ed. Altas, São Paulo, SP, Brasil.

Brasil. 1994. Lei nº 8.906, de 4 de julho de 1994. Dispõe sobre o Estatuto da Advocacia e a Ordem dos Advogados do Brasil (OAB). Diário Oficial da União, Brasília, 05 jul. 1994. Disponível em: http://www.planalto.gov.br/ccivil_03/leis/18906.htm. Acesso em: 09 mar. 2026.

Gil, A.C. 2019. Como Elaborar Projetos de Pesquisa. 6ed. Altas, São Paulo, SP, Brasil.

Gitman, L.J. 2001. Princípios de Administração Financeira. 10ed. Pearson, São Paulo, SP, Brasil.

Instituto Brasileiro de Geografia e Estatística [IBGE]. 2025. Volume de Serviços Varia 0,1% em Maio. Disponível em: https://agenciadenoticias.ibge.gov.br/agencia-sala-de-imprensa/2013-agencia-de-noticias/releases/43967-volume-de-servicos-varia-0-1-em-maio. Acesso em: 2 mar. 2026.

Iudícibus, S. 2017. Análise de Balanços: Enfoque Econômico-Financeiro. 11ed. Altas, São Paulo, SP, Brasil.

Kassai, S. 1997. As Empresas de Pequeno Porte e a Contabilidade. Caderno de Estudos (FIPECAFI), São Paulo, SP, Brasil, v. 9, n. 15, p. 60-74, jan.-jun. 1997.

Marion, J.C. 2018. Contabilidade Empresarial. 19ed. Altas, São Paulo, SP, Brasil.

Moura, M. 2025. Gestão Empresarial em Escritório de Advocacia de Pequeno Porte. Revista Eletrônica OAB-RJ, Rio de Janeiro, RJ, Brasil.

Ordem dos Advogados do Brasil [OAB]. 2015. Código de Ética e Disciplina da Ordem dos Advogados do Brasil. Conselho Federal da OAB, Brasília, DF, Brasil. Disponível em: https://www.oab.org.br/arquivos/codigo-de-etica-e-disciplina.pdf. Acesso em: 09 mar. 2026.

Ramírez-Urquidy, M.; Aguilar-Barceló, J. G.; Portal-Boza, M. 2018. The Impact of Economic and Financial Management Practices on the Performance of Mexican Micro-Enterprises: A Multivariate Analysis. Revista Brasileira de Gestão de Negócios (Review of Business Management), São Paulo, SP, Brasil, v. 20, n. 3, p. 319-337, jul.-set. 2018.

Ribeiro, O.M. 2017. Série + em Foco – Estrutura e Análise de Balanços. 12ed. Saraiva, Rio de Janeiro, RJ, Brasil.

Santos, L.R. 2022. Gestão Financeira e Estratégica para Escritórios de Advocacia. 1ed. Altas, São Paulo, SP, Brasil.

Serviço Brasileiro de Apoio às Micro e Pequenas Empresas [SEBRAE]. 2024. Inadimplência Atinge 1 em Cada 4 Pequenos Negócios no Brasil. CNN Brasil. Disponível em: https://www.cnnbrasil.com.br/economia/financas/inadimplencia-atinge-1-em-cada-4-pequenos-negocios-no-brasil-aponta-sebrae/. Acesso em: 2 mar. 2026.

Stripe [Full reference not found in the original document]

XP Investimentos [Full reference not found in the original document]

Article originating from the Final Course Work of the Specialization in Business Management of the MBA USP/Esalq

To learn more about the course, click here and access the MBX Academy platform