Most law firms set out annual revenue projections for the next year early – at times long before they could even understand if the present year’s projections would be met.
There are quite a few challenges to this approach – especially if you’re looking to get the revenue projections right. Determining what’s going to happen a year and half around the line is difficult – there are a lot of variables involved.
You don’t even know the price of mangoes a month down the line. It depends on different variables – the weather, the supply, the demand for mangoes worldwide, the government policies and more. You could take an error margin of around 5% but even then there isn’t a surety you would get it right after a month.
For businesses, things are a lot more complex. The variables are a lot more – from the fixed overhead costs to the variables.
What you need is a good strategy.
Setting Strategic Revenue Projections – The Right Way to Set Revenue Projections for Law Firm
Your strategic budget doesn’t just give you one traditional budget – instead, you underline a lot many goals and expectations and set budget for each.
What happens, thus, is that instead of looking at everything together, you’re looking at only one, piece by piece. So, if you need 10 fruits, you focus on the price of one mango, the price of one grape, the price of one papaya and so on. You may go wrong in a few but you won’t go wrong totally. Plus, studying them individually will help you get better insights, ones that you wouldn’t get otherwise if you looked at ‘fruits’ as a whole.
This reduces the error of margin. You’ve a greater probability of going wrong in your projection should you consider the price of all the 10 fruits together – which leads to more variables, than when you add up each individually. Focusing on each goal or component gives you a better chance of getting it right. Additionally, it helps you get better management.
In a strategic budget, you have three parts – one where you make a projected revenue, one where you make an estimation of projected expenses and another where you record the projected profits and cash flow. However, it is how you derive at these projections that makes a difference.
Projected revenue, for instance, is the bug that’s difficult to catch. Law firms have constantly changing scenarios – from the unpredictability of clients to government policies and employee management, there are a good many things that can go wrong.
Simply taking a percentage growth and trying to work things around it isn’t the ideal way – instead, as I said above, it’s about looking at the different components together – the practice group levels – to understand the growth you can possibly achieve.
How Far Ahead Should You Carry Out Revenue Projection?
That’s the other question to ask yourself when you get to set revenue projections for law firm.
To know how far ahead you could ideally forecast, there are a number of things that we need to consider. The legal market in India, for instance, is even now concentrated mostly domestically, unless one is working at a LPO.
That means that you need to know just how long you could continue your present growth – and the answer may lie in india’s GDP itself. Studies state that most organizations cannot grow faster than the country’s economy, but that isn’t the sole criteria.
Let’s suppose you are selling eggs for a living. The primary indicator would be just how many people are there in the neighbourhood who eat eggs. That would be your potential – to do more, you would have to reach out to other neighbourhoods. However, not all egg eaters would buy from you at all times. They could order online or buy from other sellers. It’s your competitiveness, brand credibility and market position that would determine actually how many egg buyers would flock to you.
Similar is the case with mid sized law firms. You need to look at how competitive you are and your market position, to make the right assumption. You could use the DCF analysis to help you do the same.
The DCF analysis, while we would not get into the nitty gritties of it, states the following:
- If your organization is slow growing, and operates in a highly competitive industry with low margins, you shouldn’t forecast ahead for more than one year.
- You could forecast for as many as 5 years, if you have been witnessing outstanding growth for the last few years, and are in a dominant position in the market. Forecasting for 10 years is probably foolhardy.
How to Set Revenue Projections For Your Law Firm?
Most law firms have different groups – like one for the litigation and one for taxation. Ask the team leaders the fundamental questions – like the number of deals in the pipeline, or the cases to go on trial soon. Enquire from them how they think they can respond to changes – like enquiring from the tax team what effect would it have if the government increased the tax bracket next year by 10%? The individual leaders are much better prepared to answer these questions than anybody else.
The next thing would be looking at the individual members – what is the work coming in from existing clients? What is the percentage of new clients each month on an average? How many billable hours does an employee have on an average? Important to note is that you need to do this for each practice group.
After this, look at the number of hours you expect each member to work the next year to achieve the goal – from the amount of workload you see. Normally, you would have someone working around 1,800 hours a week. So if you see your projections state that members may have to work more than 1800 hours a year, you are looking at an understaffed scenario. And if it’s less than 1,800 hours, you need to get more clients and work to avoid over-capacity.
If you feel that there would be over capacity in a certain department, it is a good idea to re-evaluate the current marketing strategy and transfer a few members, where possible to other groups. On the other hand, understaffing means that you need to allocate more budget to your recruitment team so that they are able to hire the right talent next year. If you’re already on a healthy budget from the last few years, you may even want to look at acquisitions to maintain a balanced headcount.
The other thing to note is that not every payment would come as expected. Even the Government doesn’t give you the tax rate you need – changing it often to their liking. Life’s unfair, and even if you’ve the best circumstances, you would have to face a default at one time or the other. You have to discount the billings by a realization rate – and you might want to look at the realization rates of your previous years here. Realization rate depends on different factors though and with many mid-sized firms, drop over the years.
With some clients, you would know that it would be an easy affair, with others you do not. New clients and assignments are difficult to forecast too. Additionally, when calculating the realization rate, you need to look at discounts if any, given to particular clients, transition costs of lateral hires or any alternative fee arrangements.
Building the Foundations is Important To Set Revenue Projections for Law Firm
The above paragraphs state one important thing – you need to have the basic fundamentals cleared to be able to make revenue forecasts correctly.
To reach the right ballpark, you need to focus on realistic expectations. When you are asking your team leaders to give you the specifics and their assumptions, it’s important that they focus on the following:
- The ground revenue projections they currently get
- Evaluate key revenue assumptions strictly
- Understand sales channels and their prospects
To do all this properly, team leaders need to take note of the following, as applicable.
- The total number of clients they could actually serve
- The amount of calls they make and the amount of time it takes on an average to close a deal
- Customer satisfaction and sales channels – which includes the speed and effectiveness
- Any seasonality in question – like for litigation, courts could be closed for the summer break.
Focusing on Customer Service
While you may be a medium sized law firm, the one thing that will separate you is your customer service. Customer satisfaction works across all services and industries.
Let’s talk about Air India and Jet Airways.
Both are in the same league, and don’t have the reputation of low cost carriers. They offer seats with more leg space, good food and are premium carriers in the country. However, unless you’re left with no option, you probably wouldn’t want to go for Air India – which has been traditionally notorious for poor customer service. You wouldn’t know what to do if your flight gets late. You wouldn’t know what to do to get refunds. And you wouldn’t enjoy the entire journey.
Customers and repeat clients continue to happen when they are happy – and revenue projections need to take into account just how many repeat clients you have. It needs to take into account the number of clients you normally keep, versus the number of clients who wouldn’t want to try out your service because they were unhappy. Building on customer satisfaction ultimately helps you set better revenue projections.
The Top Tips to Keep in Mind to Set Revenue Projections for Law Firm
The other thing to note when setting revenue projections for your firm is that you shouldn’t look at making implicit assumptions – even when it seems most likely. Let’s go back to the egg seller example. It may seem likely that if two people from the same family buys eggs, the third member of the family could eat eggs too. However, you really cannot be sure unless you know it.
Similarly, you may want to believe that your staff could handle the client workload. You may not anticipate any difficulty staffing up but it could happen – a reason you need to look carefully at whether your employees would be able to manage workload, and the recruitment drives, if any, you need.
Assumptions must be tested and verified.
The other common mistake is to mistake assumptions for facts. Let’s take a look at the egg seller example again. He only caters selling eggs to your neighbourhood. You may likely want to assume that he ‘never’ sells eggs to others outside the neighbourhood. However, the word ‘never’ is the problem. He could sell eggs to those outside the neighbourhood, should they come to him, a reason you only need to use the word ‘never’ only when there is no other possibility. If you feel that the growth rate shouldn’t dip below a certain level, it’s likely that it won’t. You cannot possibly guarantee it.
The next thing to do is to be disciplined while making risk analysis, and focus on each point, including making a best and worst scenario case. This would ensure that you know both the extremes. To do this properly though, you would need to talk to all stakeholders or team leaders, who in turn, need to be properly knowledgeable, as we talked before.
It’s difficult to make accurate revenue projections. Just arriving on an expected desired market growth rate compared to current year revenues isn’t going to work, after all. However, focusing on the basics can just help you hit the right ballpark.