How to create a financial forecast for a virtual law firm?
Developing and maintaining an up-to-date financial forecast for your virtual law firm is key in order to maintain visibility on your business’s future cash flows.
If you feel overwhelmed at the thought of putting together a virtual law firm financial forecast then don’t worry as this guide is here to help you.
We'll cover everything from: the main objectives of a financial forecast, the data you need to gather before starting, to the tables that compose it, and the tools that will help you create and maintain your forecast efficiently.
Let's get started!
Why create and maintain a financial forecast for a virtual law firm?
In order to prosper, your business needs to have visibility on what lies ahead and the right financial resources to grow. This is where having a financial forecast for your virtual law firm becomes handy.
Creating a virtual law firm financial forecast forces you to take stock of where your business stands and where you want it to go.
Once you have clarity on the destination, you will need to draw up a plan to get there and assess what it means in terms of future profitability and cash flows for your virtual law firm.
Having this clear plan in place will give you the confidence needed to move forward with your business’s development.
Having an up-to-date financial forecast for a virtual law firm is also useful if your trading environment worsens, as the forecast enables you to adjust to your new market conditions and anticipate any potential cash shortfall.
Finally, your virtual law firm's financial projections will also help you secure financing, as banks and investors alike will want to see accurate projections before agreeing to finance your business.
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.
What information is used as input to build a virtual law firm financial forecast?
A virtual law firm's financial forecast is only as good as the inputs used to build it.
If you are creating (or updating) the forecast of an existing virtual law firm, then you mostly need your accounting information, key historical operating non-financial data, and your team’s input on what to expect for the coming years.
If you are building financial projections for a virtual law firm startup, you will need to have done your research and have a clear picture of your competitive environment and go-to-market strategy so that you can forecast sales accurately.
For a new venture, you will also need a precise list of the resources needed to keep the virtual law firm running on a day-to-day basis and a list of the equipment and expenditures required to start the business (more on that later).
Let's now take a closer look at the elements that make up your virtual law firm's financial forecast.
The sales forecast for a virtual law firm
From experience, it is usually best to start creating your virtual law firm financial forecast by your sales forecast.
To create an accurate sales forecast for your virtual law firm, you will have to rely on the data collected in your market research, or if you're running an existing virtual law firm, the historical data of the business, to estimate two key variables:
- The average price
- The number of monthly transactions
To get there, you will need to consider the following factors:
- Your reputation and level of expertise in the legal industry can greatly impact your average price. Clients may be willing to pay a higher price for your services if they perceive you as a highly skilled and reputable lawyer.
- The complexity and type of legal services you offer can also affect your average price. For example, specialized legal services such as intellectual property law may command a higher price than more general services like contract drafting.
- The overall economic climate can have an impact on the number of monthly transactions for your virtual law firm. During times of economic downturn, businesses and individuals may be less likely to seek out legal services, resulting in a decrease in transactions.
- The level of competition in your niche can also play a role in your average price and number of monthly transactions. If you are operating in a highly saturated market, you may need to lower your prices or increase marketing efforts to attract clients and maintain a steady stream of transactions.
- The use of technology and efficiency in your virtual law firm can impact both your average price and number of monthly transactions. By utilizing technology to streamline processes and reduce overhead costs, you may be able to offer competitive prices while also increasing the number of transactions you can handle.
Once you have an idea of what your future sales will look like, it will be time to work on your overhead budget. Let’s see what this entails.
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 operating expenses for a virtual law firm
Once you know what level of sales you can expect, you can start budgeting the expenses required to operate your virtual 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 virtual law firm will include some of the following items:
- Your staff costs, including salaries, benefits, and training expenses
- Accountancy fees for tax preparation and financial reporting
- Insurance costs for professional liability, cyber liability, and general liability
- Software licenses for case management, document management, and billing systems
- Banking fees for virtual banking services and wire transfers
- Virtual office rental fees for a professional business address
- Marketing and advertising expenses for online promotion and brand building
- Website hosting and maintenance fees for your virtual law firm website
- Virtual receptionist services for call answering and client intake
- Virtual assistant services for administrative support and document preparation
- Online research and database subscription fees for legal research and information gathering
- Virtual meeting and video conferencing software fees for remote client meetings
- Cloud storage fees for secure document storage and sharing
- Continuing education and professional development expenses for you and your staff
- Virtual office supplies and equipment costs, such as printers, scanners, and laptops
This list will need to be tailored to the specificities of your virtual law firm, but should offer a good starting point for your budget.
What investments are needed to start or grow a virtual law firm?
Creating and expanding a virtual law firm also requires investments which you need to factor into your financial forecast.
Capital expenditures and initial working capital items for a virtual law firm could include elements such as:
- Technology equipment: This includes items such as computers, printers, scanners, and software that are necessary for running a virtual law firm. As technology is constantly evolving, it's important to budget for regular upgrades and replacements.
- Communication tools: In order to effectively communicate with clients and team members, you'll need to invest in tools such as video conferencing software, messaging platforms, and virtual phone systems. These tools will ensure smooth and professional communication within your virtual law firm.
- Furniture: While a virtual law firm may not require a traditional office space, you'll still need to invest in furniture for your home office or co-working space. This may include desks, chairs, filing cabinets, and storage solutions.
- Legal research resources: As a law firm, you'll need access to legal research databases and resources in order to provide high-quality services to your clients. These can be costly, so it's important to budget for them in your expenditure forecast.
- Security systems: With sensitive client information being shared virtually, it's crucial to invest in security measures such as firewalls, encryption software, and data backup systems to protect your clients' data and maintain their trust in your firm.
Again, this list is not exhaustive and will need to be adjusted according to the circumstances of your virtual 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 virtual law firm
The next step in the creation of your financial forecast for your virtual 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 virtual law firm?
Now let's have a look at the main output tables of your virtual law firm's financial forecast.
The forecasted profit & loss statement
The profit & loss forecast gives you a clear picture of your business’ expected growth over the first three to five years, and whether it’s likely to be profitable or not.
A healthy virtual law firm's P&L statement should show:
- Sales growing at (minimum) or above (better) inflation
- Stable (minimum) or expanding (better) profit margins
- A healthy level of net profitability
This will of course depend on the stage of your business: numbers for an established virtual law firm will look different than for a startup.
The projected balance sheet
The projected balance sheet gives an overview of your virtual 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 virtual 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 cash flow forecast
Your virtual 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 virtual 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 virtual 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 virtual law firm's financial plan - so that banks or investors can assess seasonal variation and ensure your business 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 virtual law firm's financial forecast?
Using the right tool or solution will make the creation of your virtual law firm's financial forecast much easier than it sounds. Let’s explore the main options.
Using online financial forecasting software to build your virtual 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.
Hiring a financial consultant or chartered accountant
Hiring a consultant or chartered accountant is also an efficient way to get a professional virtual law firm financial projection.
As you can imagine, this solution is much more expensive than using software. From experience, the creation of a simple financial forecast over three years (including a balance sheet, income statement, and cash flow statement) is likely to start around £700 or $1,000 excluding taxes.
The indicative estimate above, is for a small business, and a forecast done as a one-off. Using a financial consultant or accountant to track your actuals vs. forecast and to keep your financial forecast up to date on a monthly or quarterly basis will naturally cost a lot more.
If you choose this solution, make sure your service provider has first-hand experience in your industry, so that they may challenge your assumptions and offer insights (as opposed to just taking your figures at face value to create the forecast’s financial statements).
Why not use a spreadsheet such as Excel or Google Sheets to build your virtual law firm's financial forecast?
Creating an accurate and error-free virtual 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.
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
- Having a financial forecast enables you to visualise the expected growth, profitability, and cash generation for your business over the next three to five years.
- Tracking actuals vs. forecast and keeping your financial projections up-to-date is the only way to get a view on what your virtual law firm future cash flows may look like.
- Using financial forecasting software is the mordern and easy way to create and maintain your forecasts.
This is the end of our guide on how to build the financial forecast for a virtual law firm, we hope you found it useful. Don't hesitate to contact us if you want to share your feedback or 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
- Example of financial forecast
- How to project sales for a business?
- Example of financial forecast for business idea
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Founder & CEO at The Business Plan Shop Ltd
