This is the first in a three-part series on how to do forecasts for your law firm and some of the issues to think about. This first one is on revenue, the ones on expenses and on cash are available by clicking the links.
As a law firm, forecasting your revenue is an essential part of your financial planning process. A revenue forecast helps you plan for the future, make informed business decisions, and identify potential financial challenges. In this blog post, we’ll provide an overview of how to forecast revenue in a law firm, including key steps and best practices.
Step 1: Gather Historical Data
The first step in forecasting your law firm’s revenue is to gather historical data. This data should include your firm’s revenue for the past few years, broken down by month or quarter. You should also look at other factors that may have influenced your revenue in the past, such as changes in the economy, client demand, or the legal landscape. For example, it would be straightforward for conveyancers to look at their 2021 results and think that would continue – but of course, that year includes the SDLT holiday and so is a “false economy” which is unlikely to be repeated according to Today’s Conveyancer.
Even for new, or start-up firms, this thought process can be followed. How many hours did you charge last year? What were your billings?
Grounding your forecast in the reality of the past is a great starting point, but it is not the complete answer.
Step 2: Analyse Trends and Seasonality
Once you have gathered your historical data, the next step is to analyse trends and seasonality. This means looking for patterns in your revenue data, such as whether revenue tends to be higher or lower during certain months or quarters. You should also look at any external factors that may have influenced these patterns, such as holidays or major events. More people move house on a Friday at the end of the month, the urban myth (and the BBC) has us believe more people instruct divorce lawyers in January and employment lawyers in September.
There are likely other revenue trends within your business. For example, newer fee earners probably bill a little less in their first few months. So whatever figure you might have in your head, maybe needs to be pro-rata downwards in the first few months of someone moving departments or being hired etc
Step 3: Consider Future Factors
After analysing your historical data, the next step is to consider future factors that may impact your revenue. This could include changes in the number of office you have, shifts in client demand, or new competitors entering the market. You should also consider any changes you plan to make to your business, such as expanding your services or hiring new fee earners.
Step 4: Develop Multiple Scenarios
When forecasting your revenue, it’s essential to develop multiple scenarios based on different assumptions. For example, you could develop a best-case, worst-case, and most-likely scenario. This allows you to plan for a range of outcomes and make informed business decisions.
You can then use these different scenarios to see how on track you are – it’s not just about how you are tracking the most likely case (assuming you are!) its also about why you haven’t quite achieved the best case; what variables that went into that didn’t quite come to pass? What can we learn about making revenue better in the next year?
Step 5: Review and Update Your Forecast
Finally, it’s important to regularly review and update your revenue forecast. This ensures that you are staying on track and making adjustments as necessary. You should review your forecast at least once a quarter and update it as needed based on changes in your business or the external environment.
As much as this update is a numbers exercise, it’s about using that update to drive business performance. If a particular figure has moved in an unexpected way (up or down!) then drilling into the “why” of that helps you to make much more informed decisions.
Best Practices for Forecasting Revenue in a Law Firm
In addition to the key steps outlined above, there are several best practices you should follow when forecasting revenue in a law firm:
- Use a combination of quantitative and qualitative data to inform your forecast.
- Involve key stakeholders, such as partners and solicitors, in the forecasting process to ensure buy-in and alignment.
- Consider the potential impact of legal events and regulatory changes on your revenue.
- Regularly review and update your forecast to ensure accuracy.
You might also want to read our blogs on forecasting expenses and cash. If you have any questions or concerns about forecasting in your own law firm then feel free to get in contact.