The Complete Guide to Your Law Firm's Finances

This is the time of year when we set—and, for some of us, quickly break—our New Year’s resolutions. But some resolutions are more important than others.

As we enter our third year of living with the coronavirus, facing continuous uncertainty and unpredictable market fluctuations, the resolutions that prioritize our well-being are vital. Financial well-being is an important piece of that puzzle and one, thankfully, that we, and our law firms, can plan for.

Try as they might, law firms aren’t immune to market changes. If anything, firms must adapt more quickly and more efficiently than businesses in other industries. While pivoting fast is typically not a hallmark of the legal industry, law firms must be able to anticipate market conditions, how these conditions might impact the law, and what their clients can do to best prepare and protect themselves. Lawyers need to turn all of this introspection and planning inward for themselves.

To continue to serve your clients most effectively, your firm must be operating efficiently. You must have a consistent cash flow that allows you to continue marketing campaigns, acquire clients, and hire new lawyers to do the work.

The key to this is a comprehensive financial strategy. Here’s how you should get started building yours:

What’s the first step in the journey to a sound financial future?

Start with informed planning. Though the way the pandemic will continue to affect our lives may change, the financial information you have gathered over the last couple of years, along with the lessons you’ve learned, will be vital in preparing for what’s to come.

We know that COVID is here to stay, so your law firm must adapt to thrive and grow. Think both short-term and long-term and keep a careful eye on law firm funding. Get in the habit now of monitoring your cash flow and capital every week. This is one resolution that must stick.

How can law firms improve their short-term finances?

Improving your firm’s short-term finances starts, like all great projects, with a spreadsheet. The hard numbers are most important here. What is your law firm’s cash flow? Cash on hand? Available lines of credit? What expenses do you have? Have you paid yourself and your team, and if so, how much?

If you’ve kept close track of these metrics over the last few years, begin analyzing these figures to discern short-term patterns. If you haven’t, there’s no time like the present to start!

The first figure to check out is your cash reserves. You should have enough in your account to cover a month of expenses, but it’s best if you can cover three or more months’ worth of expenses.

To infuse your firm with cash, consider whether there is a way to accelerate your collections process. If possible, shift away from contingency fees so you earn more of your fee upfront. If not, consider how you can take steps to reduce collections and receivables.

Additionally, make sure that you’ve paid yourself and your people. With the pandemic, the last thing you need is for your staff to worry that you aren’t able to cover their salaries. Give them peace of mind, if possible, that their job is secure and stable.

Pay close attention to the story that the numbers tell and evaluate the figures realistically and regularly. We recommend having a firm grasp on what these metrics are on a weekly, monthly, quarterly, and yearly basis. Learn just how often you should be tracking what with our reporting guide. You won’t be able to realize the big payday that you anticipate in Q4 if your firm runs out of capital in Q2.

What’s next after a law firm has solidified the short-term?

Adjust your budget as needed and work toward building reserves. If the past two years have taught us anything, it’s that we need a rainy day fund. Building those reserves and continuing to cover monthly operating expenses will likely require revisiting your budget and jettisoning unnecessary expenses, such as printing costs. It might also require re-evaluating and improving your current billing and collections methods.

Also, don’t forget that you’re not a nonprofit. Clients expect good work, and you should be paid for that good work. Accurate and timely billing, availability of pre-bill approvals, and transparency of the process benefit all parties. Improved technology around billing and collections can reduce possible friction with clients and, in turn, give you more time to focus on case strategy. Considering your law firm’s short-term finances is invaluable in continuing its day-to-day operations, acquiring new business, and preparing for long-term expansion.

What should my law firm’s long-term financial strategy look like?

The key to your long-term financial strategy is simply to have one! Start thinking and documenting your plan now—you can always adjust it as you go along to account for changes in the market.

Here are some important questions to ask yourself when creating your firm’s long-term plan:

  • Consider your law firm’s key goals. Do you want to be the go-to for real estate matters? The leading experts on corporate securities or mergers and acquisitions? A one-stop shop for all general business matters? A small practice specialized in intellectual property or healthcare? A law practice that focuses on plaintiffs’ injuries? What does meaningful growth look like for your firm and its practice areas?
  • Decide how you can support your desired growth. Draft a profitability model that will make it achievable. Be realistic when compiling your model. What you think is achievable in three years will be different from what you can do in ten. Consider both.
  • Ensure that you have both short-term and long-term access to sufficient working capital. This may look like opening new lines of credit, asking clients to pay portions of fees upfront, or taking out merchant cash advances or bank loans. What do you anticipate your capital needs will be in a year? What about in five years?
  • Stick to your budget and continue to monitor your financial performance. Always keep in mind how your short-term financial situation can support or hinder these goals.
  • Schedule yearly check-ins for your long-term goals. Has your firm’s performance exceeded expectations? How can you continue down your desired path? It’s also important to complete personal check-ins on how your practice has evolved and to make sure that you’re supported and content. Long-term finances are important, but so is satisfaction with your practice — for you, your attorneys, and your staff.

How can my law firm obtain funding?

“Neither a borrower nor a lender be”: if you operate your law firm like this line from Hamlet, you’re not running your law firm like a business. Like your short-term and long-term goals, your law firm’s need for funding will be specific to your firm. The way you access that funding will also vary.

Some ways that you may be able to finance your firm’s growth include loans from private lenders, financial institutions, or government lenders, like the Small Business Administration or private equity. Some lenders will help you with litigation funding, which will cover any costs you incur while you’re defending a client. Others will help you cover your day-to-day operations or marketing costs. As with any transaction, you should conduct your due diligence and ask around for referrals from your financial advisor and other firms that you trust.

You may also be able to tap into your personal savings or loans from friends and family to start or maintain your practice. Other options include financing your firm through credit cards or lines of credit. Keep in mind that accumulating credit card debt is inherently risky and that you and your firm should carefully consider these risks.

Revenue-based financing once your firm is up and running is a great option. With this option, you pledge a percentage of your future revenue in exchange for an investment of cash.

We also recommend researching whether your firm qualifies for various loans such as those targeted specifically to small businesses or to provide financial relief due to the ongoing pandemic. No matter which method of funding you choose, ensuring your firm has adequate capital is important to continuing your operations, paying yourself and others, and achieving your long-term growth.

What are the basics of law firm budgeting and financial reporting?

Keeping accurate, comprehensive records is key to running your firm smoothly and achieving any long-term goals. Well-organized law firm accounting records are a must, including a detailed budget and financial statements. Keep track of capital in and out and stay on top of your income statement.

The optimal practice is the most consistent practice, and technology can be your best friend here. There are important insights to be obtained by reviewing your budget: Which cases are the most profitable? Which drain the most resources? Where is money being spent but not made? Pay close attention and adjust regularly as needed.

What are best practices for invoicing and payments?

Capital is important in continuing to run and grow your law firm. This requires regular and timely payment from clients, which can be difficult to stay on top of when you’re also busy handling the day-to-day demands and operations of your firm.

Here are a few tips:

  • Establish clear billing policies. One of the easiest ways to improve your billing practices is to train your attorneys and staff on them. It’s also prudent to make sure your clients understand your policies. If specific clients require any particular customizations, make sure you have a way of keeping track of them.
  • Consistency is key! Make sure that your firm’s attorneys and staff are tracking their time each day. But accurate time tracking is more than about consistency. You should have guidelines for how lawyers enter their time in your system. The easier it is for attorneys to capture, track, and enter time, the easier it is for you to process bills and collections.
  • Think about your billing structure. For larger matters, consider requiring upfront payments or a retainer fee. Monthly flat fees are helpful if your firm needs regular income but adjust the fee upward if and when a matter grows and requires more time and resources.
  • Add technology to reduce the stress of handling billing. See our previous tips on how to speed up your monthly billing process here.

How can legal technology support my firm’s financial success?

Increasing profitability doesn’t hinge on billing. Firms must create long-term client relationships through excellent work, and it’s easier to do excellent work when you’ve minimized administrative friction and improved accessibility to your firm’s information.

Technology can truly transform your law firm’s operations. From billing and case management to integrated platforms for one-stop access for your clients, tech can help you run your law firm smoothly and allow you to focus on your long-term growth. Choosing the right technology makes it easy to invest intelligently in your law firm — smart tech investments should be a yearlong resolution too.

Are you ready to manage and grow your firm the way all high-performing practices do?

Grow your firm’s brand and clientele. Enable your staff to hit billable targets painlessly. Then run reports to continuously optimize your firm to reach more profitability. All in one platform.
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