How to create a financial forecast for a solo law firm?

If you are serious about keeping visibility on your future cash flows, then you need to build and maintain a financial forecast for your solo law firm.

Putting together a solo law firm financial forecast may sound complex, but don’t worry, with the right tool, it’s easier than it looks, and The Business Plan Shop is here to guide you.

In this practical guide, we'll cover everything you need to know about building financial projections for your solo law firm.

We will start by looking at why they are key, what information is needed, what a forecast looks like once completed, and what solutions you can use to create yours.

Let's dive in!

Why create and maintain a financial forecast for a solo law firm?

Creating and maintaining an up-to-date financial forecast is the only way to steer the development of your solo law firm and ensure that it can be financially viable in the years to come.

A financial plan for a solo law firm enables you to look at your business in detail - from income to operating costs and investments - to evaluate its expected profitability and future cash flows.

This gives you the visibility needed to plan future investments and expansion with confidence.

And, when your trading environment gets tougher, having an up to date solo law firm forecast enables you to detect potential upcoming financing shortfalls in advance, enabling you to make adjustments or secure financing before you run out of cash.

It’s also important to remember that your solo law firm's financial forecast will be essential when looking for financing. You can be 100% certain that banks and investors will ask to see your numbers, so make sure they’re set out accurately and attractively.

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What information is needed to build a solo law firm financial forecast?

The quality of your inputs is key when it comes to financial modelling: no matter how good the model is, if your inputs are off, so will the forecast.

If you are building a financial plan to start a solo law firm, you will need to have done your market research and have a clear picture of your sales and marketing strategies so that you can project revenues with confidence.

You will also need to have a clear idea of what resources will be required to operate the solo law firm on a daily basis, and to have done your research with regard to the equipment needed to launch your venture (see further down this guide).

If you are creating a financial forecast of an existing solo law firm, things are usually simpler as you will be able to use your historical accounting data as a budgeting base, and complement that with your team’s view on what lies ahead for the years to come.

Let's now zoom in on what will go in your solo law firm's financial forecast.

The sales forecast for a solo law firm

The sales forecast, also called topline projection, is normally where you will start when building your solo law firm financial forecast.

Creating a coherent sales projection boils down to estimating two key drivers:

The average price
The number of monthly transactions

To do this, you will need to rely on historical data (for an existing business), market research data (for both new and existing solo law firms), and consider the elements below:

Client Demographics: The demographic profile of your clients, such as their age, income, and education level, can affect the average price of your services. For example, if you primarily serve high-income individuals, you may be able to charge higher rates for your services compared to serving lower-income clients.
Technology: The technology you use in your law practice can also impact your average price and number of monthly transactions. For instance, using advanced legal software can allow you to handle more cases efficiently and increase your billable hours, thereby increasing your average price.
Practice Area: The type of law you practice can also affect your pricing and transaction numbers. For example, if you specialize in a complex and niche area of law, you may be able to charge higher rates compared to a general practitioner.
Reputation: Your reputation as a solo practitioner can significantly impact your average price and number of monthly transactions. If you have a strong track record of winning cases and satisfied clients, you may be able to command higher rates and attract more clients.
Economic Climate: The state of the economy can also influence your pricing and transaction numbers. During a recession, clients may be more price-sensitive, and you may need to adjust your rates accordingly to remain competitive and attract clients.

After the sales forecast comes the operating expenses budget, which we will now look into in more detail.

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The operating expenses for a solo law firm

The next step is to estimate the expenses needed to run your solo law firm on a day-to-day basis.

These will vary based on the level of sales expected, and the location and size of your business.

But your solo law firm's operating expenses should include the following items at a minimum:

Staff costs: This includes salaries, benefits, and any other expenses related to hiring and retaining staff members, such as payroll taxes and health insurance.
Accountancy fees: As a solo law firm, you may need to hire an accountant to help with tax preparation, bookkeeping, and other financial tasks. These fees can vary depending on the complexity of your business and the services you require.
Insurance costs: As a lawyer, it is important to have professional liability insurance to protect yourself and your business from potential legal claims. Other insurance costs may include property insurance for your office space and business interruption insurance.
Software licenses: As a solo law firm, you will likely need to invest in software to assist with legal research, document management, and billing. These software licenses can add up quickly and should be budgeted for accordingly.
Banking fees: You will need to open a business bank account to manage your firm's finances. This may include monthly maintenance fees, transaction fees, and fees for using certain banking services.
Rent: If you plan to have a physical office space, you will need to budget for rent, utilities, and other related expenses.
Marketing and advertising: To attract clients and grow your business, you may need to invest in marketing and advertising efforts. This could include website development, social media advertising, and other promotional materials.
Professional development: As a lawyer, it is important to stay updated on changes in the law and to continue developing your skills. This may include attending conferences, workshops, and other professional development opportunities.
Office supplies: This can include basic office supplies such as paper, pens, and printer ink, as well as any specialized supplies needed for legal work.
Travel expenses: If you need to travel for client meetings or court appearances, you will need to budget for expenses such as transportation, lodging, and meals.
Telephone and internet: As a solo lawyer, you will likely need a reliable phone and internet connection to communicate with clients and conduct legal research. These expenses should be budgeted for in your operating costs.
Bar association fees: As a licensed attorney, you will be required to pay annual fees to the state bar association. These fees may vary depending on your location and the type of law you practice.
Office equipment: This can include computers, printers, and other necessary office equipment. It's important to budget for equipment maintenance and repairs as well.
Utilities: In addition to rent, you will need to budget for utilities such as electricity, water, and internet for your office space.
Client expenses: Depending on the type of cases you handle, you may need to cover expenses on behalf of your clients, such as court filing fees or expert witness fees. Make sure to budget for these expenses separately.

This list is, of course, not exhaustive, and you'll have to adapt it according to your precise business model and size. A small solo law firm might not have the same level of expenditure as a larger one, for example.

What investments are needed to start or grow a solo law firm?

Creating and expanding a solo law firm also requires investments which you need to factor into your financial forecast.

Capital expenditures and initial working capital items for a solo law firm could include elements such as:

Office Space: As a solo law firm, you will need a dedicated office space to meet with clients and conduct your work. This could include expenses such as rent, utilities, and maintenance fees.
Furniture and Equipment: In order to set up a functional and professional office, you will need to purchase furniture and equipment such as desks, chairs, computers, printers, and other necessary items.
Legal Software: As a legal professional, you will need specialized software to manage your clients' cases, keep track of billing, and handle other important tasks. This can be a significant capital expenditure, but essential for running your solo law firm efficiently.
Legal Library: As a solo practitioner, you may not have access to a large firm's legal library. Therefore, you may need to invest in your own collection of legal resources, including books, journals, and databases.
Insurance: While this may not be a traditional capital expenditure, insurance is a necessary expense for a solo law firm. You will need to ensure that you have adequate coverage for professional liability, property, and other potential risks.

Again, this list is not exhaustive and will need to be adjusted according to the circumstances of your solo law firm.

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The financing plan of your solo law firm

The next step in the creation of your financial forecast for your solo 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 solo law firm?

Now let's have a look at the main output tables of your solo law firm's financial forecast.

The projected profit & loss statement

The projected profit & loss shows how profitable your solo law firm is likely to be in the years to come.

For your solo 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 solo 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 solo 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 solo 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.

financial forecast: solo law firm balance sheet example

The cash flow forecast

Your solo law firm's cash flow forecast shows how much cash your business is expected to consume or generate in the years to come.

It is best practice to organise the cash flow forecast by nature to better explain where cash is used or generated by the solo law firm:

Operating cash flow: shows how much cash is generated by the operating activities
Investing cash flow: shows how much will be invested in capital expenditure to maintain or expand the business
Financing cash flow: shows if the business is raising new capital or repaying financiers (debt repayment, dividends)

Keeping an eye on (and regularly updating) your solo law firm's cash flow forecast is key to ensuring that your business has sufficient liquidity to operate normally and to detect financing requirements as early as possible.

If you are trying to raise capital, you will normally be asked to provide a monthly cash flow forecast in your solo law firm's financial plan - so that banks or investors can assess seasonal variation and ensure your business is appropriately capitalised.

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Which tool should you use to create your solo law firm's financial forecast?

Using the right tool or solution will make the creation of your solo law firm's financial forecast much easier than it sounds. Let’s explore the main options.

Using online financial projection software to build your solo law firm's forecast

The modern and easiest way to build a forecast is to use professional financial projection software 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 forecasting software for free by signing up here.

Calling in a financial consultant or chartered accountant

Enlisting the help of a consultant or accountant is also a good way to obtain a professional solo law firm financial forecast.

The downside of this solution is its cost. From experience, obtaining a simple financial forecast over three years (including a balance sheet, income statement, and cash flow statement) is likely to cost a minimum of £700 or $1,000.

The indicative cost above, is for a small business, and a forecast is done as a one-shot exercise. Using a consultant or accountant to track your actuals vs. forecast and to keep your financial projections up to date on a monthly or quarterly basis will cost a lot more.

If you opt for this solution, make sure your accountant has in-depth knowledge of your industry, so that they may challenge your figures and offer insights (as opposed to just taking your assumptions at face value to create the forecast).

Why not use a spreadsheet such as Excel or Google Sheets to build your solo law firm's financial forecast?

Creating an accurate and error-free solo law firm financial forecast on Excel (or any spreadsheet) is very technical and requires both a strong grasp of accounting principles and solid skills in financial modelling.

Most entrepreneurs lack the expertise required to create an accurate financial forecast using spreadsheet software like Excel or Google Sheets. As a result, it is unlikely anyone will trust your numbers.

The second reason is that it is inefficient. Building forecasts on spreadsheets was the only option in the 1990s and early 2000s, nowadays technology has advanced and software can do it much faster and much more accurately.

This is why professional forecasters all use software. With the rise of AI, software is also becoming smarter at helping us detect mistakes in our forecasts and helping us analyse the numbers to make better decisions.

Finally, like everything with spreadsheets, tracking actuals vs. forecasts and updating your forecast as the year progresses is manual, tedious, error-prone, and time-consuming. Whereas financial forecasting software like The Business Plan Shop is built for this.

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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.

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Use our financial projection templates for inspiration

The Business Plan Shop has dozens of financial forecasting templates available.

Our examples contain both the financial forecast, and a written business plan which presents, in detail, the company, the team, the strategy, and the medium-term objectives.

Whether you are just starting out or already have your own solo law firm, looking at our template is always a good way to get ideas on how to model financial items and what to write when creating a business plan to secure funding.

The Business Plan Shop's financial projection templates

Takeaways

A financial forecast shows expected growth, profitability, and cash generation metrics for your solo 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 solo 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.

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Guillaume Le Brouster

Founder & CEO at The Business Plan Shop Ltd

Guillaume Le Brouster is a seasoned entrepreneur and financier.

Guillaume has been an entrepreneur for more than a decade and has first-hand experience of starting, running, and growing a successful business.

Prior to being a business owner, Guillaume worked in investment banking and private equity, where he spent most of his time creating complex financial forecasts, writing business plans, and analysing financial statements to make financing and investment decisions.

Guillaume holds a Master's Degree in Finance from ESCP Business School and a Bachelor of Science in Business & Management from Paris Dauphine University.