Part 2 of a 3-part series around contingency fee law firms and being financially prepared throughout and beyond the pandemic.
Now more than ever, business leaders are examining their organization’s financial goals and resources, frequently updating their firm’s short-term cash flow needs and long-term financial forecasts. In a healthy economy, cash flow analysis and financial forecasting is key to successful business planning, as well as properly allocating your firm’s resources; in the midst of a crisis, it’s an indisputable necessity.
For law firms that deal with a variety of potential outcomes and unexpected durations for any case, the task of financial forecasting can seem altogether daunting – but it can be made simpler. Short-term cash-flow analysis and long-term financial forecasting are critical to securing potential financing for your firm and ensuring long-term financial viability.
At Esquire Bank, we believe that a law firm’s path towards financial forecasting should not be a difficult task. The first step is to understand what you want to forecast, and the data points needed to get started. Since our lending products are secured by the value of a law firm’s case inventory and their projected value – our law firm loan products are built on the ability to forecast projected case inventory values. As such, we have distilled the data points law firms need to forecast their case inventory values into seven key fields (many of which you are likely already capturing):
- The name of the case
- Attorney assigned to the case
- The stage of the case
- The type of case
- The estimated settlement date of the case
- The estimated settlement amount/potential insurance coverage for that case
- The estimated net fee to your firm associated with the case (for contingent fee law firms this will likely be fixed a calculation based on point 6 above)
These data points form the fundamental foundations required to forecast revenue from your law firms’ case inventory. Due to their wide-spread significance to forecasting, we advise that you make the data inputs above required fields in your case management system.
These may come across as rudimentary data points (most of which we hope you are already capturing!), but it’s how you analyze these data points and how they are maintained that makes financial forecasting an easy or difficult task.
These key data points should be analyzed in the following manner:
- Group your case inventory by partner and type of cases (i.e. auto, medical malpractice)
- Require the assigned lead partner to ascribe estimated values to each case they manage – a high, low and median values for all cases is optimal
- Include the firm’s net fee calculation after any fee-sharing arrangement
- Assign an anticipated settlement date (or duration) to all cases
- Organize your inventory by type of case and by duration (i.e. < 12 months, 1-2 years, 2-3 years, 3+ years)
- Setup an ongoing process with your attorneys (or their paralegals) to update these required fields at least quarterly.
Having this analysis complete and updated will allow you to monitor the firm’s cash flows and discuss alternative financing options in a timely manner.
As we brace for what seems to be an ongoing economic downturn, financial preparedness is critical. Preparedness, particularly for those challenged by forecasting, is best approached as a “crawl, walk, run” progression – with the “walk” stage representing financial forecasting. In order to “run,” firms must first understand their short-term cash flow needs by analyzing their current case inventory and their firm’s short-term financial needs (staffing, future case costs, IT development and other firm resources).
Law firms in particular struggle with data management as well as data quality. Do we have the right case management system? Are lead partners updating their case inventory metrics? Can our case management system produce the cash flow reporting we need? In theory, tracking and reporting on case inventory updates and revisions should be easy – in practice, it’s critical to accurate cash flow modeling and financial forecasting. Your case inventory, when properly presented, is the foundation for any bank or non-bank financing, since this is the asset or collateral for those financing firms.
Leaders are often surprised by the simplicity of taking the first steps to analyzing cash flow needs and performing financial forecasting. These key determinants are markers that law firms should be tracking, beginning with the first intake call. When properly maintained and adjusted as each case develops, those existing metrics lay the foundation of a firm’s fiscal outlook. Esquire Bank has assisted numerous firms in cash-flow analysis and financial forecasting, leveraging decades of experience from our managers. Esquire Bank has also developed forecasting tools or apps (Esquire Insight) as part of our business partnership with Litify.
When law firms forecast, average values and costs for cases can vary depending on specialty – a firm that deals primarily with automobile accidents, for example, sees a relatively low cost per case; one that deals with medical malpractice or other complex litigation might observe much higher costs. As a result of changing case costs, case values and case durations, financial forecasting is more of an “art than a science.” However, without this analysis, key decisions on case profitability, case priorities, staffing levels, investment in resources and even securing bank or non-bank financing becomes nearly impossible.
If financial forecasting goes awry, business leaders can find themselves investing in low-margin cases or improperly allocating employees and firm resources. In a financial crisis, inaccurate cash flow analysis and financial forecasting can prove fatal to a law firm.
However, getting started is relatively painless – and financial forecasting only gets easier from there.
With just the seven simple data points outlined above, law firms can project cash flow for each fiscal year, unlocking the door to financial preparedness and better cash flow management over the long term. Our management team is ready to assist with your firm’s current financial position, future cash flow projections, creating a financial forecast and assessing your financing alternatives (bank vs. non-bank financing) for today’s and tomorrow’s needs.