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Wednesday, August 30, 2017

Why Law Firms Need to Rethink the Budget Process


We’re approaching that time of year again for law firms: budget season. Cue the moans and groans.  

Why is budgeting so painful for many firms? It’s because they struggle to collect accurate data, analyze profitability, and compare and analyze year-to-date results versus the previous budget and forecast.  And because it’s incredibly challenging for firms to forecast future revenue accurately, they often end up relying on gut feelings to determine a revenue projection…or they just give up entirely.

This is dangerous, because in today’s commoditized legal industry, the budget process has become almost life-or-death important to the future of the firm. It is―or should be―a strategic exercise that delivers the basis for making critical decisions about issues such as distributions, partner expansion, financing, acquisitions and more. That means you can’t simply rely on intuition or add a set percentage to this year’s revenue plan. You need in-depth supporting information and analysis to form the basis of your budget and forecast.

But how can you make budgeting more accurate and comprehensive, yet also less painful, more efficient and more collaborative?  The short answer: Ditch the spreadsheets.

It all starts with revenue forecasting
Every firm recognizes that today’s environment is far more complex and challenging than even five years ago. Back in the days when everything was billed hourly, it was a much easier exercise to forecast revenue, which is the foundation of your budget. You simply multiplied the projected number of billable hours times hourly rates and assumed a certain percentage of growth.

It’s a different story today, with fee pressures and resulting billing models―time and materials, fixed price, alternative fee arrangements (AFAs), contingencies and more―dramatically impacting revenue generation and collectability. Multiply the revenue complexity across multiple offices and practices, each with unique fee arrangements, and add to these layers of complexity the fact that projects often span multiple years, and you can see why your forecasts might not be accurate.

To create a meaningful revenue forecast, you need to look at each practice group. No one understands the operating climate and the future of the practice better than the practice leader. For instance, how many cases are likely to go to trial next year for the litigation group? How many deals are in the pipeline for the corporate transactional group? You need to work with each practice leader to gather accurate forecasts, then pull it all together into one budget for the firm.

Why spreadsheets no longer suffice  
While collaboration with practice leaders is essential for accurate forecasting, working collaboratively using spreadsheets is somewhat of an oxymoron. Excel and other spreadsheet software has inherent drawbacks, such as complexity, propensity for errors, lack of an audit trail, and lack of a centralized way to share and revise the data. Although they are useful for many data-related tasks and activities, spreadsheets simply were never designed to support today’s budgeting, forecasting, tracking and reporting requirements.

As a result, it takes far too much time to plan for next year’s bottom line, leaving little time for analysis. With spreadsheets, the lion’s share of the budgeting effort goes into creating, consolidating, revising, finalizing and sharing the numbers back across the firm. Firm leaders literally have no time or energy left to analyze the budget and apply the findings to make informed business decisions.

Modern challenges call for modern solutions
A purpose-built budgeting and forecasting solution eliminates the tedious manual efforts of spreadsheets while delivering vastly improved collaboration, control and accuracy. It enables you to plan and budget faster, collaborate across the firm to better manage the business, improve forecast accuracy, adjust the forecast on a rolling basis as revenue assumptions change, and easily track and analyze variances.  And, significantly, it frees up time to prepare and evaluate different scenarios, such as the impact of a potential investment or mid-year acquisition/divestiture on partner distributions.

With the right software, your firm can turn the dreaded budget season into a collaborative, comprehensive and continuous process that drives firm performance through improved management of revenue, expenses, capital and the workforce. With an active and accurate budget, managing partners can move beyond business as usual to drive change and accountability across the firm.

So ask yourself this: How much of this year’s revenue can you expect next year? How will your firm determine what your growth target should be? What do practice leaders need to do to reach their individual growth figures for revenue?  

Isn’t it time you had better answers to these questions?

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