In the past few years, the working environment has changed, and the pandemic has played a huge role in this. Business all over the world has changed the way they used to work and adapted to the newer ways of working, and law firms are no exception. In this dynamic business world, one must strategize financial management.
Financial health is a vital part of law firm growth. To have the resources sufficient and working in your favor, you need to carefully allocate the budget to every need of your law firm.
If all of this is going over your head, don’t worry. In this blog, we will cover all the points regarding law firm financial management and law firm KPIs.
What is law firm financial management?
Law firm financial management is analysis, planning, organizing, directing, and controlling the financial operations of a law firm. This includes preparing financial reports like cash flow statements and profit-and-loss statements, among all other activities. We can also call this process financial management accounting.
Tips to improve your short-term financing
1. Monitor your Cash Flow and Capital Monthly
Create a spreadsheet to track your expenses and your earned cash, savings in your bank account, and balances of the firm’s credit card. Analysis, review and update, update this spreadsheet every day so you can make out how much fine short-term finance your firm has.
2. Accelerate the Procedure Collection of Payments
Lawyers usually hesitate and are reluctant to ask for payments and discuss fees and billing. It’s a crucial part of financial management to acquire your pending payments. It’s time to come out of the discomfort and make a seamless payment procedure for your clients. This will help you and your clients both to receive and pay the bills promptly.
3. Pay your Employees and Yourself
The pandemic has been stressful for almost everyone, businesses got shut down and companies practiced employee reduction. If you are in this stage, we understand that it’s a hard time for your company. In such a crisis, if your firm is terminating employees, we empathize with you, but if you are just laying off and have enough funds, then do pay your employees and yourself appropriately.
4. Build Cash Reserves
In the current scenario, it’s hard to depict what’s going to happen in the upcoming month, since you are taking care of your cash flow weekly, just make sure that you are having enough cash so it can handle continued disruption in the upcoming year. It’s vital to have enough funds to cover 3 months firm’s cash reserves for 3 months. It’s ideal to make a cash reserve that can last for 6 months. Remember, it should be earned, not borrowed. The goal is not to have the cash to pay out normal expenses but to have financial flexibility.
5. Align your Budget Regularly
In this new highly dynamic economic environment, it’s hard to tell when things are going to take a new turn. Bracing yourself for future changes is something that is going to provide you with protection. If you made your financial plan according to last year’s economic situation, then rethink about them. Is there any need to cut some overhead costs, or is there any opportunity for new marketing strategies? With new business trends, it’s crucial to update your current financial plans too.
Understanding Law Firm Terms:
1. Long-term Planning
Long-term planning is paying off long-term loans, securing long-term revenue-generating opportunities, and seeking growth opportunities for your law firm. The schedule for your cash flow will decide whether it’s for long-term or small-term planning. If cash flow, which is over a year, will come into long-term planning. If you have any financial liability like you took out a loan and you have to pay in 5 years or a case that is going to take more than a year to finish, these all come into a long-term financial liability.
Analysis and forecasting is the most important part of long-term financial planning. This way, you can have a clear view of your cash flow.
It’s natural when you are planning to improve your financial health, the first step you come across is a budget. A budget is a ground for the setting of cash flow, revenue, and profitability. If you are someone who is making a budget, head to our detailed blog about law firm budgeting and how you can create an effective one.
3. Profit Center Accounting
Profit center accounting is a practice that is done for law firm accounting profits of internal parts of the business. This is usually helpful for larger law firms that have multiple practice areas. For example, if a firm offers injury and estate law services. This method will help firm management to separate both of these and identify the financial profitability and status of it.
4. Profitability Analysis
Profitability analysis is a common procedure when it comes to cost accounting and law firm financial management. It breaks down into basic profitability outputs. Output means the services or product the firm is producing. For a law firm, output may be hours of services, in other words, billable hours. The utilization rate directly supports the profitability analysis of a firm.
5. Creating A Financial Plan
Running a law firm comes with a lot of responsibilities, out of which is creating a well-thought financial management plan. A financial plan should contain long-term financial goals and indicate the strategies to achieve the goal. Be certain to include as many financial details as you can include. Your financial plan should also include the number of previous years.
Your financial plan should include:
6. Monthly Revenue Goals
Monthly revenue goals mean the amount of revenue you want to earn generally in a month. Some months can be higher than others
7. Financial Projections
Financial projections mean how much money you want to make or how many cases you think you’ll be able to take and what you’ll be charged by the client. Strengthen this point and align previous data to get accurate results.
Breaking down your expenses and carefully allotting them with each need. You need a budget according to how much money you can bring in each month.
9. A Cash Flow Statement
A cash flow statement is what you earn every month and what you spend every month. This differs from budgets and financial projections.
We understand this might look overwhelming and a big undertaking one might feel, but law firm financial management can be a break into small pieces. Start by creating a carefully thought plan, follow guides and take the help of pre-made templates. First-timers should bring in professional help or outsource the financial strategizing, such as practice management software or finance professionals; this will not only save time but also mitigate frustration. The outside help will assist you better in serving your clients better.