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Why Your Firm’s Lawyers Should Make Revenue Projections Right Now

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At the end of 2021, managing partners will sum up their law firms’ revenues to determine areas of focus for the next fiscal year, but there’s something individual lawyers can be doing now to make this data even more useful.

Right now, halfway through the year, ask your people to project revenues on their own matters for the next three months. You’ll find that some lawyers are better than others at anticipating the amount of money they’ll bring in.

When it comes to budgeting for the future and managing caseloads, it’s extremely valuable for a lawyer to be able to accurately predict their revenues. If a certain attorney keeps going after contingency fee matters with huge payouts but they’re not winning those cases, recognizing that pattern could lead them to prioritize hourly work or pursue contingency cases only when specific prerequisites are met.

Law firm leaders should take this time to gather revenue projections on a lawyer-by-lawyer basis so that when the end of the year rolls around, they have those estimates to compare with the actual results. This skill can be taught, but firms first want to understand who’s in need of that training and how exactly each could improve. For some, they may be wildly overestimating their outcomes, while other lawyers may be unduly pessimistic.

Estimated future revenues also play a huge role in hiring and promotions, and the ability to create an accurate picture of what an individual’s or a firm’s finances will look like in six months or a year is important both for the leaders making these decisions and for the attorneys looking to move up.

The Best Way for Law Firms to Increase Their Profitability in 2021

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If you want to increase law firm profitability, you have to track it relentlessly and share the results of your analysis widely.

 

Although profits-per-partner has become a widely known metric for large law firms, most smaller firms don’t track profits assiduously. There is a world of difference between having your accountant calculate profits at year’s end for tax purposes and measuring profits on an ongoing basis for use as a decision-making tool.

 

Here are five elements of financial planning that your firm can implement to increase profitability in 2021.

 

  1. Start tracking revenues and expenses by practice area. This will allow you to run year-to-year comparisons and identify which people and practice areas are doing exceptionally well or underperforming.

 

  1. Create quarterly revenue goals by practice area and, if applicable, by office. And put these in writing.

 

  1. Use a consistent measurement, like full-time equivalent (FTE), to allocate overhead among profit centers.

 

  1. Communicate, on a regular basis, the firm’s progress toward meeting quarterly goals. As consultants to law firms, we have seen how weekly reports to partners can be easy to ignore; monthly reporting tends to work best, especially if the firm engages in meaningful discussions about the results.

 

  1. Create a marketing budget that is aligned with your revenue goals. Too often, the marketing plans prepared by individual lawyers (assuming they are asked to prepare such plans) are nothing more than rehashed versions of prior years’ reports. Instead, focus on each marketing activity in terms of its potential profitability. This will help you to avoid one of the biggest problems facing law firms – a lack of investment in effective marketing.

 

Understandably, lawyers are drawn more to growing their books of business than to worrying about boring accounting principles. When, as now, law firms, clients, and their vendors might be receiving government loans, it is especially important to be able to determine how your business is actually performing. More than ever, you should focus on profitability.

Increase Your Firm’s Cash Reserves

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As we reach the mid-point of the calendar year, law firms should be evaluating key financial metrics. It’s a great time to begin tax planning for the full year and to preview next year’s tax returns. Starting now gives owners time to adjust if too much or too little has been withheld. It also allows leaders to take stock of projected cash flow and expenses.

There’s one element to which firms should pay particular attention this year: cash reserves. Many are in the habit of distributing all profits to partners or shareholders at year’s end, but this means they have no cash on hand when January 1st rolls around. The legal press has finally gotten around to questioning the wisdom of draining cash reserves every year. This is a dubious strategy generally (as we wrote about back in 2015), but it could be ruinous in 2020.

Right now, the risk of a financial shock is significantly higher than usual. Employees could get sick, clients could be unable to pay their invoices, and hackers could take advantage of the vulnerabilities of a work-from-home system. The government is rapidly changing rules and requirements, which makes it difficult to plan, and a firm’s other sources of revenue, like subletting office space, are much less reliable.

Beyond the safety net that cash reserves provide, law firms can use cash to expand through acquisitions of distressed firms. There will be more disgruntled but talented lawyers on the market over the next 6-9 months. And with interest rates as low as they are, now could be the perfect time to grow your firm’s market share. These are all better potential uses of firm profits than dividing them among the owners.

Because of the dip in revenues that generally accompanies the holidays in the last quarter, firms should work with their accountants now to plan toward ending the year with cash reserves to cover, at minimum, two months’ worth of expenses.