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Why Are Financial Projections a Must for a Law Firm’s Success?

Financial planning and management are of immense importance irrespective of the size of the law firm. An adequate approach needs to be adopted for this which is finalized after planning and debating. The hypothesis needs to be in place with respect to the vision and mission of the law firm but it need not be vague in nature.

Owners of the law firm are required to perform at every moment and for this, a financial plan forms the backbone of the performances in relation to the financial projections. Financial planning not only helps in the management of the finances but also provides an insight into the financial progress and failures.

What do you mean by financial projections?

Financial projections are fundamentally the measurements of a law firm’s business plan which are exclusively designed to assess the company’s income and expenditures in the future. They are the future forecasts of the expenses and incomes of a business for a specific period of time.

For making an accurate financial projection, a lot of factors are taken into consideration during accounting for law firms like cost data analysis, balance sheets, income and cash flow statements, external market factors examination, firm’s financial history, internal factors, and more. One needs to have both short-term and mid-term financial projections which mean accounting for 1 year with monthly outlining and accounting for 3 years with yearly outlining respectively.

Why law firms need financial projections?

Financial projections form an integral part of the law firm’s planning stage along with providing an opportunity to bring on board some of the most competent people. An omnipotent representation of the financial numbers assures the interest of senior employees, legal experts, and potential partners in joining a law firm and making its vision meet reality. Missing out on financial projections by great margin depicts a vital red flag that needs immediate attention.

Various types of financial projections

  • Month-wise balance sheets

A holistic business view of the assets and liabilities are discussed in the monthly balance sheets with the inclusion of uncertain capital expenditures throughout the year during legal accounting.

The profit and loss balances also account for this, providing a clear estimate of the due payables/receivables. In short, it makes a law firm realize its assets’ availability and the possibility of liabilities.

  • Predictions of the cash flow

The cash transactions which are expected are divided into daily, weekly, and monthly cycles. This leads to consistent checks ensuring timely solutions after the identification of potential concerns.

Apart from this, cash flow predictions make the vendors, suppliers, and creditors know your financial position and ability to pay them. If you face regular out of cash situations, this information will help you arrange for the same in advance.

  • Sales and clients forecast

The sales and clients forecast refers to the ability of a law firm to sell at its best potential in the market and the forecast of revenues form the various clients respectively. It is easy to make the forecast for regular clients and is also very appropriate when it comes to budget allocation and making the team better at managing the finances.

  • Monthly budget assignment

When you assign a monthly budget, you get an estimate of how your law firm is performing financially every month. This helps in preparing well for the forthcoming fiscal year with the inclusion of all the expenses. Apart from this, variable and fixed costs, bonuses, cost-cutting should also be included in the budget.

  • Financial outcomes’ projections from operations

Projecting financial results is the projection of total profits and losses which a law firm expects in the future. This objectively tracks the profit and loss by including the services and sales revenue, operational expenses like rent, wages, ads, the cost for goods, and more.

This estimate helps in determining the law firm’s financial rise or downfall in the future and take appropriate steps for the same.

  • Including financial ratios in the business plan

The performances of the businesses and their competitors can be compared easily using the financial ratios. Apart from this, it lets you know about specific operations which need immediate attention. Make sure to add the following financial ratios to include in the business plan:-

  • Current ratio = current assets / current liabilities
  • Profit margin ratio = (total income + interest expense period-wise) / revenues
  • Average collection days to receivable ratio= accounts receivable annually / net credit sales annually
  • Debt ratio = total debt / total assets
  • Quick ratio = (stocks + cash + investment bonds + accounts receivable) / current liabilities
  • Return on total assets = net income / total assets average
  • Appendix

The appendix refers to deposits which are not a part of the actual plan but assist someone in understanding the plan. It basically includes the pointers that aides and explains the assumptions and conclusions in the plan. The only thing that needs to be taken care of is the inclusion of pointers only that offer a positive contribution to the readers.

How to make financial projections?

  • Set up your business goal

Setting a business goal is essential in order to thrive amongst the competitors. The establishment of important areas of practice along with clients’ recognition is vital along with strategic planning to reach out to the maximum clients. Apart from this, you should set up an accomplishment time and lay down the required steps for the same.

  • Variables identification

The factors which keep on changing are the variables and they might or might not affect a business. The entire values during accounting for law firms for profit and loss are considered as variables which include salaries, income sources, normal expenditure, etc. A business needs to make them visible in the forecast post identification to ensure zero disturbance upon taking effect in the projections.

  • Survey the past trend

One should plan as per the business trends only and this information can be accessed easily through past surveys. You should know exactly the time market provides opportunities to you along with information on extra resources if needed at all.

  • Figure out your income and costs

Recognizing the clients and predicting the income is a normal practice followed by the law firms. Every team member should be assigned a specific amount of client billing, helping you assess the revenue along with their performances. Fixed costs like wages, rent, electricity, etc., should be estimated and managed appropriately.

  • Make a budget

Creating a budget post these steps is vital to know the amount of cost you need to meet the set targets. Everything from the fixed costs to the variables should be included along taking into account the taxes and interests. It is important to adopt a realistic approach here and ensure that the fixed costs are properly included with a tap on the variable costs.

  • Break-even analysis

No business wishes to witness a break-even point where its expenses match the gains with zero profitability. The break-even analysis lets you know what all measures you need to take so that you have more gains as compared to the costs for definite profitability.

  • Evaluate your assets and liabilities

Assets and liabilities are not the direct account contributors of profit and loss but a part of the overall law firm value at the end of a financial year. It is important to analyze them to know any additions to the investment or the number of liabilities discharged by the firm.

  • Hire industry experienced accountant

When you hire an accountant who is familiar with your industry, he will bring a lot of benefits to the table. The reason being he already knows about the various types of profits, expenses, sales which a business generates and will provide you with financial projections which are realistic in nature.

Conclusion

The above-mentioned steps cover law practices and financial projections of a law firm. It is recommended to break the financial projections by months for 1 year at least and include the balance sheet and income statement. If the cash needs are not clearly identified, try to add a separate cash flow statement.

It is vital for at least one partner to have in-depth knowledge about financial planning in order to have an accurate financial projection. However, most of the law firms look forward to outsourcing this task along with law firm bookkeeping which requires financial expertise at each and every step of making financial projections.

Eliza Davies
Eliza Davieshttps://www.cogneesol.com/
Eliza Davies holds seven years of experience as a Business Development Manager at Cogneesol; an outsourcing firm offering finance & accounting solutions to the businesses worldwide. Along with this, she is passionate to write about business growth, entrepreneurship, accounting and artificial intelligence topics and providing solutions that change the way people run their business.

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