The 3-Step Process to Useful Revenue Projections
We’ve written before about maintaining cash flow in a crisis and how projecting revenues is vital to the planning process. While this isn’t a concern limited to economic hard times, the uncertainty caused by the pandemic dramatically increases the importance of establishing and implementing a sound system for estimating future revenues.
Establishing a process for projecting revenues should consist of three major steps.
- Have the firm’s timekeepers estimate revenues on a monthly basis.
Lawyers and paralegals who bill by the hour or charge flat fees should project revenues for the next 30 and 60 days. For contingency fee cases and significant matters billed by the hour, projecting revenues requires detailed scenario analysis. Whether, for example, the case is settled before or at summary judgment or it goes to trial will have a huge impact on how much the firm gets paid and when. The firm should gather data on each of these possibilities. Revenues for contingency cases should be estimated for the quarter in which money would be received.
A lot of lawyers will push back on this task, claiming there are too many variables to even begin making predictions. To address this concern, lawyers should prepare low, medium, and high estimates for every case. A lawyer working on a contingency fee matter, for example, might estimate a medium payment of $100,000 that would be collected by the firm in one year. A high-end recovery might require the plaintiff surviving summary judgment, and that in turn could generate estimated revenues of $300,000 in eighteen months. Creating three scenarios—low, medium, and high – for significant matters is especially important now, when the degree of uncertainty is increasing.
- Have someone at the firm aggregate and analyze the information.
These projections won’t mean much until someone puts them together and figures out their implications. Too many law firms generate financial reports without using them to aid in sound decision-making. The key is to look for patterns systematically. For example, is there a quarter on the calendar when almost nothing is scheduled to come in? Is there a case with such a major gap between the worst-case and best-case scenarios that the difference is worth the combined revenues of several other matters? This will not only affect the firm’s cash flow but its workflow. In this example, the firm might want to dedicate a lot more time to ensuring that one case achieves the ideal result.
- Follow up.
This process isn’t very effective if management fails to follow up. Lawyers should be updating the estimates for their cases monthly. It’s a learned skill, and some attorneys will find that their initial estimates were wildly inaccurate. It’s common for lawyers to be overly optimistic about the high end of their revenue estimates and overly pessimistic about the low end for specific matters. But, as with many skills, the ability to project revenues accurately improves with practice and appropriate levels of feedback and coaching.
Although the potential advantages of implementing accurate revenue projections are manifest, law firm managing partners and administrators should expect many lawyers to avoid trying to project revenues for fear that they will be criticized if the actual results don’t measure up. It is therefore critical that firm leaders emphasize revenue projections as an important management and decision-making tool and not as an opportunity to take punitive actions against those lawyers who try to project revenues in good faith.
For firms interested in implementing this kind of process, know that financial projections and cash flow planning are areas we can help with. Please get in contact by phone or email.