How Small Law Firms Can Predict Their Revenue Stream

A big thank you goes to idea sounding board and über-blogging lawyer/philosopher Lee Rosen for planting the seed of this idea.

Managing cash flow is, without question, one of the major stress points of a small practice. Wondering how much money will be coming in next week, worrying about whether you’ll have enough to cover your bills three months from now, questioning where your practice will be, financially, next year at this time can be daunting.

The uncertainty about when cash is coming in can lead to a lot of unwelcome additional pressure.  However, it’s all probably a lot more manageable and predictable than you might otherwise think.

While several elements of an overall cash flow analysis are intangible and unpredictable – it’s equally true that many parts of your practice’s cash flow are both: (a) reasonably predictable; and (b) largely under your own direct control … and that means an accurate revenue forecast isn’t far off.

Most lawyers will readily concede that the majority of their expenses fall neatly into those two categories, but are reluctant to subject their revenues to the same analysis. Lawyers often resist the process of forecasting their revenue, thinking: “How can I accurately predict how many new clients I’ll get next quarter?” or “How can I know which of my clients will be sued next month, or who will need M&A services next?”

True, there is at least some merit to each of those questions (although perhaps not as much as one might initially think – that’ll be the subject of another post), but to focus primarily on those external factors alone is to miss an opportunity to operate as your own, revenue-forecasting CFO.

For example, we all have (or ought have) a detailed list of current tasks, deadlines, and upcoming events. Frequently, we’ve already allocated specific time (read: “budgeted”) in our calendars to complete those “to-dos.” Deadlines may be client-driven, or set by our area of practice; that is, litigators may have court-ordered scheduling orders to follow, corporate practitioners may have SEC filings, Board meetings or tax filing dates, and so forth.

Here’s where you channel your “inner CFO” and take the next step – translate your budgeted workflow into budgeted revenue:

1. Take your scheduling information and add the information you already know about your engagement terms (whether you’re billing by the hour, by the completed task, etc.).
2. Factor in your own billing practices (i.e. when you anticipate billing for the task).
3. Add in your own knowledge of your client’s pay schedule (do they typically pay on time? On 30 days? 60 days?).
4. Aggregate this data over your client base.

Voíla!  You have the start of a logical – and likely pretty darn accurate – revenue prediction. Match that up against your anticipated client acquisition activity and your expenses (which ought be highly predictable), and you’ve got the makings of a comprehensive financial forecast for your entire practice.

Business savvy in-house counsel, at companies of all sizes, have utilized this technique for a long time, albeit from the flip side (the cost side), and particularly with respect to litigated matters. Setting out a litigation plan and budget, containing the timing of planned actions, expenses, logical case settlement points, and probability analysis, is a basic step in budgeting legal department resources needs.

There’s absolutely no reason why the same technique can’t apply equally well to formulate the basis for a litigator’s own revenue forecast.

Forecasting revenue in this fashion also serves, where needed, as an additional reminder to send your bills out on time. Collectability may not always be completely assured (though it can often be managed by a combination of client screening, effective and ethical use of retainers, and basic good client communication), one thing is virtually certain: if the client isn’t billed, the client probably isn’t going to pay.

So – consider rolling up your schedule into a revenue forecast, and take a big step toward having more of a comfortable, predictable revenue stream.