How you’ll manage your firm’s finances is a key consideration when setting up a new practice. You’ll need to think about planning, organising, and monitoring short-term and long-term financial aspects so you can keep your practice on track strategically and grow your revenue.
Automating and systemising each aspect of day-to-day financial management using specialist legal practice technology minimises the likelihood of human error and offers you an immediate view of how the business is faring. It’s also invaluable for monitoring progress.
Making A Realistic Financial Plan And Forecasting Cash Flow
A financial plan for your law firm will include long-term goals and the strategies you’ll use to reach them. Initially, you could calculate how much revenue you want to generate each month and the number of cases that are required to meet that goal/how much you’ll charge each client.
Carefully itemise your expenses within a budget and make regular cash flow forecasts so you know if a cash shortfall is upcoming. Controlling cash flow is a crucial part of financial management in a new practice and underpins growth.
A cash flow forecast is a dynamic document, however – it needs to be detailed and checked/updated regularly to be as accurate as possible. Comparing estimated revenue and expenditure with the actual figures also allows you to fine-tune your projections in the future.
Banking And Day-To-Day Financial Management
The type of bank account you open will depend on the structure of your firm – whether you’re a sole practitioner, for example, are setting up a business partnership, or a limited company.
As you need to keep client money separate from that of the firm, opening a client account and an office account is standard practice, with ‘Client Account’ being required in the account title. You may also wish to open a business savings account.
Invoicing, credit control, and payroll can all be managed using integrated law practice or generic accounting software that provides easy access to important management information and insights.
Monitoring The Financial Performance Of Your New Practice
Key Performance Indicators (KPIs) help you monitor your new firm’s performance and manage strategic financial goals. They lead you to your best marketing strategies and can highlight issues, such as debt collection processes that aren’t effective.
Here are just some of the KPIs that can provide valuable information and make it easier to manage your practice finances:
- Monthly revenue billed
- Realisation rate – this is the amount billed as a percentage of the number of billable hours that have been worked
- Monthly revenue collected
- Collection rate – this is the amount collected compared with the amount billed
- How much debt the firm is carrying
- Net profit margin – this is net income as a percentage of revenue
Short Term Vs Long-Term Financial Management
Short-term financial management includes ensuring that any outstanding monies are collected efficiently so that practice cash flow is healthy and your firm can pay the regular bills – it’s very easy for a business to decline financially if income and expenditure aren’t managed effectively in the short term.
If any cases are likely to take more than a year to conclude, they should typically be incorporated into your long-term financial planning, however, along with loans or borrowing with a term of 12 months or more.
Both types of financial management are important for the practice but you may need to proactively carve out time to plan for the longer-term and ensure your new practice reaches its full potential in the future.
Chris Bristow is a business debt expert at Real Business Rescue, company rescue, restructuring and liquidation specialists with a wealth of experience in supporting company directors in financial difficulty.
