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

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 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.

  1. 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.

  1. 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.

  1. 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.

Evaluating Your First 50 Days of 2018

February 19th is the 50th day of 2018.  It’s an auspicious time to take stock of how your firm has started the new year.  Many of you may be thinking that it’s too early to know how the year is going.  I hear that sentiment a lot in my role as a coach and consultant to lawyers and law firms.

It’s not too early to know.  In fact, the opposite is more likely to be the case.  The trajectory your firm or individual book of business is on now will likely carry through the entire year—unless you make a concerted and consistent effort to change that trajectory.

It seems like the year has just started but your actions and results often carry a distinct momentum.  For example, a law firm that charges by the hour and invoices its client on a monthly basis has already largely baked in its results through April.  Time that is billed now will be invoiced to clients in March and the money won’t be received until April or perhaps May.  Thus, if such a firm wants to dramatically change its annual financial performance, it shouldn’t wait until June or July to do so.

The longer a firm waits to change its performance the more dramatic the change in performance has to be to reach a certain result.  This is a simple mathematical truism.  If a lawyer wants to generate $500,000 annual book of business, and has only collected $200,000 by June 30, she will need to collect $300,000 in the second half of the year.  That’s a 50% increase on the results achieved through June 30.  But if collected revenues on September 30 are only $300,000, the lawyer needs to collect $200,00 in the last three months of the year when they were only able to collect $300k during the first nine months.  This is one reason why the results through the first six or seven weeks of the year are more important that they might initially seem.

And this brings us to another problem law firms tend to have when evaluating their results this time of year.  How to you distinguish between isolated and systematic disruptions.  The tendency is to attribute disappointing results to one-time events.  For example, a partner might say that her revenues are lower than expected because a certain deal closed earlier than expected.  Another might explain he billed fewer hours in January because he had to relocate his family because of a mold or flooding problem in his house.  The implication is that this disruption is such a singular event that it isn’t likely to happen again.

One-time disruptive events do in fact occur.  The mold and flooding example is probably a good example of that.   But too often law firm leaders fail to recognize issues as being systematic.  While it’s true that January’s disappointing collections are the result of a particular client not paying their bill on time, late payment is far from an isolated problem at most firms.  In January one client was late for one reason and in February some other client will present some other seemingly unique reason for delaying payment or disputing a bill.  Every month will have its seemingly unique soap opera relating to collections or business development, without the firm realizing that it has a systematic problem on its hand.  As a parent you may be surprised what your kids do that causes you to visit doctor’s offices, but it’s not hard to predict that parents of children of a certain age will go to the doctor more often that did before they had children.

And so the idiosyncratic thing that happened at the beginning of 2018 to explain why revenues are down or why marketing results are disappointing is probably not as unique or you might think.  And that means that you need to make systematic changes to dramatically improve your results.

If the full year was compressed into a single week, we are now approaching the very end of the first day of that week.  Contrary what you might hear from others or feel, it’s not too early to take a long hard look at your year-to-date performance and see what it means for the rest of 2018.

In fact, if you don’t act now, it will only become harder to attain your goals.