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Running any business—including a law firm—starts with creating a documented long-term financial strategy and profitability model that aligns with your short-term budgets and reports, as well as with your long-term goals. These things are critical to managing your law firm finances the right way. While few law schools teach students how to run a business, knowing how to run a business is critical to running a successful law firm.
In this article, we’ll help you understand law firm finance and how to plan, while staying on top of your daily budget.
We’ll supply you with the tools and direction to develop solid financial best practices, and we’ll also talk about financial strategy, budgeting, and bookkeeping.
What is law firm financial management?
Law firm financial management involves planning, organizing, directing, and controlling the financial operations of a law firm. This includes, among other activities, tracking profitability and expenses to predict and plan for revenue growth.
Understanding law firm financial management
When it comes to understanding and improving financial performance, a natural first step is to create a budget. A budget lays the groundwork for your cash flow, revenue growth, and ultimately, your profitability. Creating a law firm budget and getting your finances in order is arguably one of the most important starting points when hanging your own shingle.
No matter how much money you currently have, what practice area you’re in, or how long you’ve spent practicing, you’ll need a budget in order to help your law firm succeed. The basics of a law firm budget include startup costs, recurring subscriptions, and projecting revenue. A budget sets your expectations for cash flow and expenses throughout the year, reducing the chances of missing an expense or bouncing a check. You will also be able to set revenue benchmarks—giving your law firm a measuring stick to know if you are meeting your goals or if you need to adjust your business plan to succeed.
Profitability Analysis –
Conducting a law firm profitability analysis means measuring lawyer and staff performance. Regardless of whether law firms bill on contingency, flat fee or by the hour, they must measure productivity in order to understand their profitability.
A profitability analysis is a common practice when it comes to cost accounting and law firm financial management. Essentially, it’s a breakdown of the profitability of an organization’s output. Output refers to the products or services an organization is producing. So, for a law firm, output might be the hours of services provided and how many of those hours are billable.
Utilization and Realization rates directly support the profitability analysis and would be a starting point in determining profitability of your firm.
Profit center Accounting –
A profit center is established within a corporation in order to determine the profitability of the subunit independently from other departments in the company and from the company as a whole. This could be because a large corporation has numerous divisions – the appliance division, the apparel division, the electronics division, etc. – and wants to measure the financial performance of each division to determine which are the most profitable.
A corporation can also establish an internal business unit as a profit center so as to compare profitability across organizational subunits.
Profit center accounting allows you to determine profits of internal areas of the business individually. This method is useful for larger firms with multiple practice areas. For example, if your firm offers family law and injury law services, it makes sense from a law firm financial management perspective to separate these two areas of the business into profit centers. This method makes sense as the requirements for these two business areas are different.
Long-term Planning –
Long-term financial planning is critical for paying off loans, securing long-term revenue opportunities, and growing your firm for years to come.
The timing of cash flow will determine whether something should be included in your short term, or long-term planning. Generally, if it’s over a year’s time, this particular activity should be included in your long-term planning. If you took out a loan and have to pay it back over five years’ time, or have a case that’s longer than a year, this would be tracked in your long-term planning. Short-term would involve your more immediate revenues and expenses. While both are important in law firm financial management, it can be more difficult to carve out the time for long-term planning. Chances are, the lights wouldn’t stay on without some sort of short-term financial plan.
Forecasting is a valuable part of long-term planning. Forecasting involves identifying the most-likely financial outcomes for your law firm.
Financial Strategy Template –
A Finance Strategy plan is integral to the function of any organization as it facilitates allocating and distributing financial resources to meet current and future strategic objectives.
What’s included in this Finance Strategy template?
Financial Vision Statement.
Financial Focus Areas.
Who is this Finance Strategy plan for?
A Finance Strategy can be developed by the finance department but can be used by all departments in an organization. All departments must ensure they are sticking to the allocated budget, as well as the targets and actions set to achieve strategic success.
How is this Finance Strategy template relevant to your organization?
You and your team can use this template to set up your company’s desired finance goals and accordingly come up with actions each of you can take to finance your strategic plans and achieve your financial targets.
Define clear examples of your focus areas
The first step to devising a Finance Strategy plan would be to have an understanding of the areas within your organization that your team and you want to focus on. These focus areas can be divided up per department, or per finance policy, you want to implement to attain your desired strategic goals.
Think about the objectives that could fall under that focus area
What strategic goals do your team, and you want to have planned over the next few years? Are the goals short-term or long-term? Distinguishing and accordingly setting financial objectives will give your company a solid plan to help move it in the direction of long-term success. Setting financial objectives will also make you aware of potential risks and how to mitigate or minimize the impact of said risk. Depending on your area of focus, these objectives can help you increase revenue, boost profit margins, and facilitate making investment decisions.
Examples of some objectives for the focus area of Profitability could be Close the Series A round, Improve the company’s cash flow and margins, seek to attain internal and external growth.
Set yourself measurable targets (KPIs) to tackle the objective
Financial KPIs are extremely crucial to providing you with measurable values that provide indicators of your law firm’s financial performance, with regards to expenses, sales. profits and cash flow, as a means of enabling an organization to optimize and achieve its business objectives and financial goals
An example of KPIs for the objective could be to improve the law firm’s cash flow and margins, reduce accounts receivable, increase gross margins, increase operational margins (just to name a few).
Remember it’s crucial that all the KPIs you set have measurable goals tied to them.
Implement related projects to achieve the KPIs
Projects can be viewed as the actionable tasks of your set goals; they are the jobs you undergo to achieve your end strategic objectives.
A few examples of projects that enhance profitability within your law firm could be to contact and set up meetings with VCs; Assisting founders to focus on key drivers of their business; Hire bookkeeping and admin team to handle invoices and payments and manage inventory; Create a client discount scheme to recognize early payments; Generate an efficient Project Information Management and Streamline operations (just to name a few).
Utilize Cascade tools to track and visualize performance
While projects can be perceived as the actions that help your team and you to achieve your goals, widgets can assist in providing visual aids of the progress of your goals. Setting up widgets on Cascade’s dashboards in the form of charts and graphs can help you to track your team’s performance on a specific objective.
Creating a sustainable financial plan
A financial plan should contain long-term financial goals and strategies to achieve those goals. When creating your financial plan, be sure to include as much specific financial information as possible. Your financial plan, at minimum, should contain numbers for your first year of operations.
your financial plan should include:
Monthly revenue goals: The amount of money you want to make every month. Note: some months will naturally be higher than others given consumer trends, your area of practice, and other market factors.
Financial projections: This is what you expect to earn. Include the number of cases you think you’ll be able to take on and what you’ll be charging each client. Strengthen your projections with historical data or other reliable sources of information to determine these numbers.
Budgets: This is a breakdown of your expenses and what your money will be going towards each month.
A cash flow statement: What you earn and spend each month. This is different from your projections and budget and should be updated as the year progresses.