Only by having a comprehensive understanding of where your firm has been and where it is likely to go — without making changes to your existing strategy – do you have any chance of adopting a law firm marketing plan that will successfully achieve your 2014 financial goals. Do it any other way and you may be setting your firm up for failure.
This time of year most law firms will be setting financial goals and making strategic marketing plans for the coming year.
You will be setting goals and making strategic marketing for the coming year, right??
Before you get started, do you know, with a reasonable degree of certainty, what your firm will earn over the next 12 months if you made no changes to your current marketing strategy?
If you are not at least 90% sure about this number, you may be setting your firm up for failure.
The only way to plan your firm’s marketing for next year (you are going to plan your firm’s marketing for the next year, right??), is to understand where your firm has been and where you want it to go.
Only then can you put the appropriate law firm marketing plan in place to meet those goals.
And as with any business, your firm’s financials from previous years are the best predictors of next year’s profitability.
So, as you close up your books for 2013, it’s time start doing what most lawyers dread the most (aside from writing a check to the tax man): making sense of your firm’s financials.
This article is the first part of a 2-part series. Today we will discuss how to use your firm’s profit & loss statement as a predictor next year’s financials. Next Monday we will drill down on revenues by client so you can approach next year’s marketing with laser focus.
Oh yeah, for the mathematically challenged among us (and there are many), if the thought of analyzing financials makes you queasy, don’t let it. You need no sophisticated accounting or mathematical skills to do this. Simple arithmetic and a couple of hours is all it takes.
Here’s how you get started:
1. Produce a Profit & Loss report for the past three years.
Prepare a profit and loss statement breaking the numbers down on a month-by-month basis with totals for the past three years. If you are using bookkeeping software like QuickBooks, this is a breeze to produce.
In QuickBooks, go to Reports > Company & Financial > Profit & Loss Standard > Customize Report. In dates, select “Last Fiscal Year” and in the Columns area, for Display Columns by, select “Month”. Hit OK. Change the dates to produce the report for the previous two years. That’s it!
If you don’t have accounting software, you will be able to produce the revenue portion of this data through your client billing software and then add in the expenses from your checking account register. If you are not using either, you can build this report relatively quickly using your bank statements (or tax returns) and a spreadsheet.
Save time if you don’t have accounting software: This exercise mostly requires looking at total expenses. While it’s advisable to drill down on your firm’s individual expenses for the past year, for marketing purposes, we will only be looking at total expenses. So if you are preparing this report without the assistance of bookkeeping software, simply produce a total monthly expense number.
If you have not been practicing that long, run the report for as many years/months that you have available.
For the purpose of this review, the more years of data you can review the more accurate your predictions will be.
2. Identify unusual seasonality.
Law firms, like many other businesses, have natural peaks and valleys during certain times of the year. Take a look at the total revenue, total expenses and profits on a month-to-month basis. Compare these three items to previous years. Start to look for patterns. Do revenues drop consistently in any particular month. Do expenses spike?
Keep in mind, a spike or dip in revenue or expense may have been the result of a busy or slow period one or two months before when taking into consideration delays in collection or vendor invoicing.
By identifying seasonality, you can take actions to offset its financial effects, or make plans to use the time more effectively. For example:
- Avoid incurring significant expenses during known slow months and try to adjust arrangements with vendors to move big one-time expenditures (like your PLI renewal) to months where you know you will be flush with cash.
- Adjust your marketing plan to increase marketing efforts 90 – 120 days before known slow months to try to increase business during that time (it will take at least that much time to see the results of your marketing efforts).
- Plan to use the extra downtime during slow months to take vacation time, or to work on big marketing initiatives, like speaking or PR campaigns. Coming back to work well rested and productive, or creating additional revenue with new marketing campaigns, will offset revenue dips in slower months.
EGO CHECK: Don’t just assume you know everything about the seasonality of your firm without actually looking at the numbers. You’re not just looking for obvious seasonal dips or spikes (i.e., business slows in August when everyone is on vacation, duh), but also mini dips and spikes that may occur throughout the year for a variety of reasons. For example, you may find a consistent 20% drop in revenue every March. Oh yeah, it just so happens your biggest two clients attend an industry conference in February and they are all MIA for a week. 20% fewer billable hours in February means 20% less revenue come March.
3. Identify growth (or attrition) trends.
With few exceptions, law firms tend to grow (or shrink) at reasonably consistent levels. A law firm’s profitability tends to expand or contract in parallel with incremental changes in the attorney’s network of clients or referral sources.
Unless an attorney is intentionally winding down their practice (or is not doing any marketing), he or she will add new networking contacts every year. Those contacts will lead to new referrals. Plus, the attorney’s base of clients that will do repeat business (or who will refer the attorney to their friends) will also grow over time.
Take a look at your firm’s revenues, expenses and profits. It’s best to do this on a quarterly and annual basis for as many years as you have available (monthly numbers can be unpredictable because of short-term financial swings).
See if you can spot any trends in terms of expansion or contraction for all three items.
If your practice has averaged a 10% profit growth year over year for three years, in all likelihood you could expect something close to the same for next year without making material changes in your current marketing plan or client base (and provided your expenses stay largely the same).
However, if 10% growth does not help you achieve your new financial goals, you at least now know that you are going to have to make some big changes in your marketing plans from last year.
4. Examine wild swings in revenue.
One of the most difficult things about running a small law firm is learning how to deal with swings in income. In many practices, a spectacularly profitable month can often be followed by two bad ones.
These financial ups and downs can make it difficult to set business goals or making changes in your personal life that require a big financial commitment, like purchasing a home, planning a wedding or having kids.
But financial swings – even in a small law practice – can be anticipated and mitigated if you understand why they are happening.
This makes planning for the future significantly easier, and puts you on a better path to success.
If your firm is experiencing wild swings in revenues over long periods of time, make sure you understand exactly why this is happening. We are not talking about short-term month-to-to-month revenue swings, but significant swings on a quarterly or annual basis.
In a small law firm, minor changes in client retention can have exaggerated effects on profitability. This is particularly the case if a majority of the firm’s revenues are being produced by very few clients (or cases). The firm becomes very exposed to losses if any one client leaves or a big case ends.
Not rocket science, I know. But if your firm looks like this, you’d be wise to heed this warning:
A firm with healthy financials can afford to lose one or two key clients (or cases, or referral sources) without putting it in serious financial jeopardy.
If your practice is in this position, unless you are comfortable with the prospect of defaulting on your student loans, the sole focus of this year’s marketing plan should be to increase the number of clients contributing to your firm’s bottom line.
Until you get there, it would be prudent to know in advance where, exactly, you can quickly cut material expenses in the event a key client leaves unexpectedly.
Anyone who has been there before will tell you, it’s not a position that you ever want to find yourself in.
Find out what is causing the wild swings in revenue or expense, and determine if the precipitating factors are likely to repeat in the coming year. If yes, now is the time to start doing something about it.
5. Look for market driven abnormalities.
Nearly all practices are affected by market factors. If the economy goes south, M&A, corporate finance and real estate attorneys suffer, while bankruptcy, securities arbitration and personal injury lawyers thrive.
Some practices are heavily affected by changes in legislation. For example, many of the immigration attorneys in the NYC shared office space at Law Firm Suites reported a significant spike in business after the Supreme Court’s ruling on DOMA. And if you are a healthcare regulatory lawyer, can you say…ca-ching!
Look for abnormalities in your firm’s cash flow and see if they were attributable to something other than seasonality. Then ask yourself whether any of those conditions are likely to happen again next year. Also think about any market driven factors that may never have affected your practice but may in the next year. Factor this into you forecast for the next year.
While no one has a crystal ball, it’s possible make educated guesses about future business conditions with a reasonable degree of certainty.
If economic indicators are showing signs of improvement, the corporate attorney should consider doubling down on his marketing spend and hire an associate, whereas the bankruptcy attorney should consider scaling her overhead back.
6. Let’s pull it all together.
Here’s where the most difficult math comes in, and really, it’s not that bad:
a. Take your revenues and expense numbers from last year and increase (or decrease) each based on any growth or attrition trends you found in Step 2, above.
b. Look at the causes of any wild swings in revenue or expense (both previous and anticipated) and adjust the numbers in Step (a) up or down based on the likelihood of these events happening. For example, if there is a 25% chance that a case will end that will result in a 20% loss in revenue over the course of the next year, then decrease last year’s revenue number by an additional 5% (25% of a 20% revenue boost being 5%). Do this calculation for each item.
c. Do the same calculation that you did in Step (b), except taking into consideration anticipated market driven abnormalities.
d. Look at your seasonality trends. These numbers are already factored into your revenue and expense numbers. But if you can make small changes to what you are already doing, for example, moving your vacation time to the slowest weeks/months of the year, factor in the additional revenue that your firm would see over the course of the year.
e. Add all the pieces together to get your total number. This is what your firm will most likely earn over the next year if you made no changes to your strategic plans.
There’s one more piece to this calculation…and it’s a big one.
The key to growing a law practice is to keep existing clients happy, so they continue to do more business with the firm over next year. The same is true for your key referral sources.
By doing this, the firm doesn’t have to start at zero every January.
In practice areas where a client does one piece of business with the firm and is not likely to do another (personal bankruptcy, immigration, PI), you should be tracking the extent to which clients refer their family and friends, and you must have a marketing system in place to encourage this (you do have a system in place to encourage clients to refer their family and friends, right?).
By getting a handle on what your firm’s current clients (and referral sources) are likely to produce next year:
- you’ll know exactly how much new business you’ll need to acquire to meet your revenue goals; and
- you’ll know, with laser focus, the fastest and easiest ways to get it.
So in two weeks, in the second part of this article we are going to drill down on revenue by client and revenue by referral source.
You won’t want to miss it.
See you next week.
P.S. Will 2014 be your breakout year? Will you double or triple your income? You’re going to need a great strategic plan to get you there, and we’ve made arrangements to get you exactly what you need…for free! Check out this offer for a free comprehensive law firm strategic plan from our strategic partner, Nexfirm. If you think you’ve got what it takes to build your small law firm into a 7- or 8-figure practice, you won’t want to miss this opportunity!
About Marketing Mondays
Marketing Mondays is a weekly blog series aimed at helping solo and small firm attorneys attract and retain new clients. It focuses on real-world marketing strategies that have been executed successfully by small firm attorneys, particularly those with offices in shared office space New York, including Law Firm Suites.