How to create a financial forecast for a corporate law firm?
Creating a financial forecast for your corporate law firm, and ensuring it stays up to date, is the only way to maintain visibility on future cash flows.
This might sound complex, but with the right guidance and tools, creating an accurate financial forecast for your corporate law firm is not that hard.
In this guide, we'll cover everything from the main goal of a financial projection, the data you need as input, to the tables that compose it, and the tools that can help you build a forecast efficiently.
Without further ado, let us begin!
Why create and maintain a financial forecast for a corporate law firm?
The financial projections for your corporate law firm act as a financial blueprint to guide its growth with confidence and ensure its long-term financial viability.
To create them, you will need to look at your business in detail - from sales to operating costs and investments - to assess how much profit it can generate in the years to come and what will be the associated cash flows.
During challenging market conditions, maintaining an up-to-date financial forecast enables early detection of potential financial shortfalls, allowing for timely adjustments or securing financing before facing a cash crisis.
Your corporate law firm's financial forecast will also prove invaluable when seeking financing. Banks and investors will undoubtedly request a thorough examination of your financial figures, making precision and presentation essential.
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What information is used as input to build a corporate law firm financial forecast?
A corporate law firm's financial forecast needs to be built on the right foundation: your assumptions.
The data required to create your assumptions will depend on whether you are a new or existing corporate law firm.
If you are creating (or updating) the forecast of an existing corporate law firm, then your main inputs will be historical accounting data and operating metrics, and your team’s view on what to expect for the next three to five years.
If you are building financial projections for a new corporate law firm startup, you will need to rely on market research to form your go-to-market strategy and derive your sales forecast.
For a new venture, you will also need an itemised list of resources needed for the corporate law firm to operate, along with a list of equipment required to launch the venture (more on that below).
Now that you understand what is needed, let’s have a look at what elements will make up your corporate law firm's financial forecast.
The sales forecast for a corporate law firm
From experience, it usually makes sense to start your corporate law firm's financial projection with the revenues forecast.
The inputs used to forecast your sales will include the historical trading data of your corporate law firm (which can be used as a starting point for existing businesses) and the data collected in your market research (which both new ventures and existing businesses need to project their sales forward).
Your corporate law firm's sales forecast can be broken down into two key estimates:
- The average price
- The number of monthly transactions
To assess these variables accurately, you will need to consider the following factors:
- Economic Conditions: The state of the economy can have a significant impact on the average price and number of monthly transactions for your corporate law firm. During times of economic downturn, businesses may be less likely to seek out legal services, resulting in a decrease in both average price and number of transactions. Conversely, during periods of economic growth, businesses may be more likely to require legal services, leading to an increase in both metrics.
- Legislative Changes: Changes in legislation, especially those that affect businesses, can also have an impact on your law firm's sales forecast. For example, if there is a new law that requires businesses to implement certain legal procedures, your firm may see an increase in the number of monthly transactions as businesses seek your services to comply with the new regulations.
- Specializations: Your law firm's areas of specialization can also impact the average price and number of monthly transactions. If your firm specializes in high-demand areas such as intellectual property or mergers and acquisitions, you may be able to charge higher prices and attract more clients, leading to an increase in both metrics. On the other hand, if your firm's specialization is in a less sought-after area, you may experience lower prices and fewer monthly transactions.
- Competition: The level of competition in the legal industry can also affect your sales forecast. If there are many other corporate law firms in your area, you may need to lower your prices to remain competitive. This could result in a decrease in the average price of your services. Additionally, if your competitors have a strong reputation and attract more clients, you may see a decrease in the number of monthly transactions.
- Client Referrals: The number of client referrals your law firm receives can also impact your sales forecast. If you have a strong reputation and satisfied clients, they may refer their colleagues and business partners to your firm, resulting in an increase in the number of monthly transactions. Additionally, positive word-of-mouth can also lead to an increase in the average price of your services as potential clients may be willing to pay more for quality legal representation.
Once you have a sales forecast in place, the next step will be to work on your overhead budget. Let’s have a look at that now.
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The operating expenses for a corporate law firm
Once you know what level of sales you can expect, you can start budgeting the expenses required to operate your corporate law firm on a daily basis.
Expenses normally vary based on how much revenue you anticipate (which is why, from experience, it is always better to start your forecast with the topline projection), and where your business is based.
Operating expenses for a corporate law firm will include some of the following items:
- Staff costs: This includes salaries, benefits, payroll taxes, and any other expenses related to your employees. As a corporate law firm, your staff costs will likely be one of your highest operating expenses.
- Accountancy fees: As a law firm, you will need to hire an accountant to handle your financial statements, tax filings, and other financial matters. This will be an ongoing expense for your firm.
- Insurance costs: As a corporate law firm, you will need to have professional liability insurance to protect against any potential lawsuits or claims made against your firm. You may also need to have general liability insurance, property insurance, and other types of coverage depending on your specific needs.
- Software licenses: In order to efficiently manage your firm's operations, you will need to invest in software licenses for programs such as case management software, document management software, and legal research databases.
- Banking fees: Your firm will have various banking fees, such as monthly maintenance fees, wire transfer fees, and transaction fees, associated with your business bank accounts.
- Rent: As a law firm, you will need to have a physical office space to meet with clients, store documents, and conduct business. Your rent will be a significant operating expense.
- Utilities: You will need to cover the costs of electricity, water, internet, and other utilities in your office space.
- Marketing and advertising: In order to attract clients and grow your firm, you will need to invest in marketing and advertising efforts, such as creating a website, attending networking events, and running targeted advertisements.
- Professional development: As a corporate law firm, it is important to stay updated on changes in laws and regulations. This may require your attorneys and staff to attend conferences, seminars, and other professional development opportunities, which will incur costs.
- Office supplies: Your firm will need to purchase various office supplies, such as paper, printer ink, pens, and folders, to keep your operations running smoothly.
- Travel expenses: Depending on the nature of your firm's work, you may need to travel for client meetings, court appearances, and other business purposes. These travel expenses, such as airfare, hotel accommodations, and meals, will need to be factored into your operating expenses.
- Professional fees: As a corporate law firm, you may need to hire outside consultants, experts, or other professionals to assist with certain cases. These professional fees will be an ongoing expense for your firm.
- Office equipment: In addition to office supplies, you may need to purchase or lease office equipment such as computers, printers, and fax machines to support your firm's operations.
- Subscriptions and memberships: Your firm may need to subscribe to legal publications or become members of professional organizations to stay updated on industry trends and network with other legal professionals.
- Taxes: Your firm will need to pay various taxes, such as income tax and property tax, which will be an ongoing expense for your business.
This list will need to be tailored to the specificities of your corporate law firm, but should offer a good starting point for your budget.
What investments are needed to start or grow a corporate law firm?
Your corporate law firm financial forecast will also need to include the capital expenditures (aka investments in plain English) and initial working capital items required for the creation or development of your business.
For a corporate law firm, these could include:
- Office Space: You may need to invest in purchasing or leasing office space for your corporate law firm. This could include costs such as rent, utilities, and maintenance fees.
- Furniture and Equipment: As a corporate law firm, you will need to have a professional and well-equipped office space. This may include purchasing desks, chairs, computers, printers, and other necessary equipment.
- Legal Software and Technology: In order to efficiently manage your firm's operations and provide high-quality services to clients, you may need to invest in legal software and technology. This could include case management systems, document management software, and research databases.
- Library and Reference Materials: As a law firm, you will need access to a variety of legal resources and reference materials. This could include purchasing books, journals, and online subscriptions to legal databases.
- Security Systems: Protecting your firm's confidential information and client data is crucial. You may need to invest in security systems such as surveillance cameras, alarm systems, and secure file storage to ensure the safety of your firm's assets.
Again, this list will need to be adjusted according to the size and ambitions of your corporate law firm.
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
The financing plan of your corporate law firm
The next step in the creation of your financial forecast for your corporate law firm is to think about how you might finance your business.
You will have to assess how much capital will come from shareholders (equity) and how much can be secured through banks.
Bank loans will have to be modelled so that you can separate the interest expenses from the repayments of principal, and include all this data in your forecast.
Issuing share capital and obtaining a bank loan are two of the most common ways that entrepreneurs finance their businesses.
What tables compose the financial plan for a corporate law firm?
Now let's have a look at the main output tables of your corporate law firm's financial forecast.
The projected profit & loss statement
The projected profit & loss shows how profitable your corporate law firm is likely to be in the years to come.
For your corporate law firm to be financially viable, your projected P&L should ideally show:
- Sales growing above inflation (the higher the better)
- Profit margins which are stable or expanding (the higher the better)
- A net profit at the end of each financial year (the higher the better)
This is for established corporate law firms, there is some leniency for startups which will have numbers that will look a bit different than existing businesses.
The projected balance sheet
The projected balance sheet gives an overview of your corporate law firm's financial structure at the end of the financial year.
It is composed of three categories of items: assets, liabilities and equity:
- Assets: are what the business possesses and uses to produce cash flows. It includes resources such as cash, buildings, equipment, and accounts receivable (money owed by clients).
- Liabilities: are the debts of your corporate law firm. They include accounts payable (money owed to suppliers), taxes due and bank loans.
- Equity: is the combination of what has been invested by the business owners and the cumulative profits to date (which are called retained earnings). Equity is a proxy for the value of the owner's stake in the business.
The projected cash flow statement
A projected cash flow statement for a corporate law firm is used to show how much cash the business is generating or consuming.
The cash flow forecast is usually organised by nature to show three key metrics:
- The operating cash flow: do the core business activities generate or consume cash?
- The investing cash flow: how much is the business investing in long-term assets (this is usually compared to the level of fixed assets on the balance sheet to assess whether the business is regularly maintaining and renewing its equipment)?
- The financing cash flow: is the business raising new financing or repaying financiers (debt repayment, dividends)?
Cash is king and keeping an eye on future cash flows is imperative for running a successful business. Therefore, you should pay close attention to your corporate law firm's cash flow forecast.
If you are trying to secure financing, note that it is customary to provide both yearly and monthly cash flow forecasts in a financial plan - so that the reader can analyze seasonal variation and ensure the corporate law firm is appropriately capitalised.
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
Which tool should you use to create your corporate law firm's financial forecast?
Creating your corporate law firm's financial forecast may sound fairly daunting, but the good news is that there are several ways to go about it.
Using online financial forecasting software to build your corporate law firm's projections
The modern and easiest way is to use an online financial forecasting tool such as the one we offer at The Business Plan Shop.
There are several advantages to using specialised software:
- You can easily create your financial forecast by letting the software take care of the financial calculations for you without errors
- You have access to complete financial forecast templates
- You get a complete financial forecast ready to be sent to your bank or investors
- You can easily track your actual financial performance against your financial forecast, and recalibrate your forecast as the year goes by
- You can create scenarios to stress test your forecast's main assumptions
- You can easily update your forecast as time goes by to maintain visibility on future cash flows
- You have a friendly support team on standby to assist you when you are stuck
- It’s cost-efficient and much cheaper than using an accountant or consultant (see below)
If you are interested in this type of solution, you can try our projection software for free by signing up here.
Calling in a financial consultant or chartered accountant
Outsourcing the creation of your corporate law firm financial forecast is another possible solution.
This will cost more than using software as you can expect as your price will have to cover the accountant’s time, software cost, and profit margin.
Price can vary greatly based on the complexity of your business. For a small business, from experience, a simple three-year financial forecast (including a balance sheet, income statement, and cash flow statement) will start at around £700 or $1,000.
Bear in mind that this is for forecasts produced at a single point in time, updating or tracking your forecast against actuals will cost extra.
If you decide to outsource your forecasting:
- Make sure the professional has direct experience in your industry and is able to challenge your assumptions constructively.
- Steer away from consultants using sectorial ratios to build their client’s financial forecasts (these projections are worthless for a small business).
Why not use a spreadsheet such as Excel or Google Sheets to build your corporate law firm's financial forecast?
You and your financial partners need numbers you can trust. Unless you have studied finance or accounting, creating a trustworthy and error-free corporate law firm financial forecast on a spreadsheet is likely to prove challenging.
Financial modelling is very technical by nature and requires a solid grasp of accounting principles to be done without errors. This means that using spreadsheet software like Excel or Google Sheets to create accurate financial forecasts is out of reach for most business owners.
Creating forecasts in Excel is also inefficient nowadays:
- Software has advanced to the point where forecasting can be done much faster and more accurately than manually on a spreadsheet.
- With artificial intelligence, the software is capable of detecting mistakes and helping decision-making.
Spreadsheets are versatile tools but they are not tailor-made for reporting. Importing your corporate law firm's accounting data in Excel to track actual vs. forecast is incredibly manual and tedious (and so is keeping forecasts up to date). It is much faster to use dedicated financial planning tools like The Business Plan Shop which are built specially for this.
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
Use our financial forecast templates for inspiration
The Business Plan Shop has dozens of financial forecast examples available.
Our templates contain both a financial forecast and a written business plan which presents, in detail, the company, the team, the strategy, and the medium-term objectives.
Our templates are a great source of inspiration, whether you just want to see what a complete business plan looks like, or are looking for concrete examples of how you should model financial elements in your own forecast.
Takeaways
- A financial forecast shows expected growth, profitability, and cash generation metrics for your corporate law firm.
- Tracking actuals vs. forecast and having an up-to-date financial forecast is key to maintaining visibility on your future cash flows.
- Using financial forecasting software is the modern way of creating and maintaining financial projections.
We hope that this guide helped you gain a clearer perspective on the steps needed to create the financial forecast for a corporate law firm. Don't hesitate to contact us if you have any questions!
Need a convincing business plan?
The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.
Also on The Business Plan Shop
- Financial forecast example
- How to project sales for a business?
- Financial forecast for a business idea
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Founder & CEO at The Business Plan Shop Ltd
