Sept. 15, 2021 – Lawyers, is your firm ready for the unexpected?
In the early stages of the pandemic, we interviewed attorneys from across Wisconsin to discuss strategies for increasing profitability.1
Recommendations included diversifying practice areas, accepting electronic payments, offering alternative payment plans, building out referral networks, and increasing client loyalty.
These are great strategies for long-term planning, but other strategies are needed to address unexpected events.
Here are six tips to help you weather uncertain financial times.
Tip #1: Set Up a ‘Rainy Day’ Fund
Having dedicated funds that are set aside and saved for rainy days can help law firms through revenue shortages. When determining the appropriate amount of reserve funds, lawyers should take a close look at their revenue cycles and fee arrangements.
Christopher C. Shattuck, Univ. of La Verne College of Law 2009, M.B.A. U.W.-Oshkosh 2015, is manager of Practice411™, the State Bar’s law practice assistance program. If you have questions about the business aspects of your practice, call (800) 957-4670.
For instance, law firms that look to revenue solely from contingency fee cases may need to have larger reserves than firms that rely upon hourly revenue, which is typically collected after the end of each month.
As a baseline, it is recommended that law firms have at least three months, and ideally six months, of reserve funds in place to cover monthly salaries and expenses, says Searles. These reserve funds can serve as a lifeline for law firms until additional revenue can be realized.
If reserve funds are not enough to cover unexpected downturns, businesses can also turn to short or long-term loans.
Tip #2: Obtain Credit during Good Financial Times
Financial institutions underwrite – or assess a borrower’s creditworthiness – based on various ratios, says Searles. Being in a strong financial position will generally increase the bank’s comfort level.
“A prudent business – whether a large or solo firm, will have a contingency plan in place, which includes access to funds when needed,” she said.
In a downturn economy, for example, banks may tighten their credit policies, which could make it more challenging for even a successful firm to obtain credit.
Alternatively, when a practice experiences hardship, it may not meet parameters necessary to prove creditworthiness to a bank.
Instead of waiting for financial downturns, lawyers should work with their banks during good financial times to obtain favorable credit lines. This is most optimal time to establish a lending relationship with your bank, especially when access to the credit may not be immediately needed.
Business Plans: A Practical Perspective
Don’t miss this business planning program at the 2021 (Virtual) Wisconsin Solo & Small Firm Conference (WSSFC), Oct. 28-30. Efficient businesses create plans, implement them, and most importantly, adjust the plans when circumstances change (Hello, COVID!).
This session will discuss how to accomplish all three stages — creation, implementation, and adjustment — so no matter what your business is facing, it’s poised to succeed.
Check out the full WSSFC schedule or register now.
Tip #3: Be Familiar with Your Financial Institution
There are a variety of loans available to lawyers, depending on how their law firms are structured.
A line of credit can help law firms in times of cash flow needs by providing immediate access to financing when revenues are unexpectedly low. Term loans are also available for tangible purchases, such as buildings, technology, or leasehold improvements. Partnership loans are also helpful to facilitate partner buy-ins, retirements, or other transition events.
It is recommended that law firms establish a good working business partnership with their financial institutions, as they can help identify the best financing solutions for various scenarios.2
Tip #4: Create a Business Plan
“A firm’s business plan should really operate as the backbone of the business and it serves as a roadmap for success,” Searles says.
In uncertain times, a business plan is the doctrine that can help provide sound advice and strategy. In prosperous times or periods of growth, it can also help to guide the firm and maintain a clear path.
The plan should be reviewed annually, and adjusted as circumstances change. A business plan should include key components regarding the firm’s strategic objectives, resource utilization, marketing goals, financial management, and action items that support the overall mission of the firm.
Searles recommends answering the following questions in your business plan:
What is your mission and why is that your mission?
What makes you different from your competitors?
Does your firm have a niche that provides your firm with a strategic advantage over others?
What expenses would you be able to cut during uncertain financial times?
How much cash does your firm need to stay in operation for six months?
There are several resources that are available to help with creating and updating your business plan. Start by contacting your financial institution and establishing a business banking relationship. Other options include downloading free templates from the U.S. Small Business Administration, Wisconsin Women's Business Initiative Corporation, and SCORE.
Tip #5: Add Value to Your Business Plan
Whether you are establishing a firm, considering expansion, or a transition plan, building partnerships with a knowledgeable banker, accountant, insurance agent, and financial advisor will help you reach your goals faster and optimize your resources.
“In addition to a well-prepared plan, building a team of trusted advisors to help guide your business is critical,” Searles says.
Tip #6: Look into Supplemental Coverages
Lawyers should consider having additional protections in place outside of business plans and loan options, such as business insurance (property, data, liability, and workers' compensation), retirement plans and savings, and fraud prevention services.
“These supplemental coverages can help ensure that lawyers do not end up turning to their own resources when issues arise,” Searles says.
Conclusion: Now Is the Best Time
“Do not wait until it is too late before you engage in financial planning for your firm,” Searles says.
The best time to explore credit sources is during optimal financial times, when credit is readily available and firm finances are sound. Establish a good working business relationship with your financial institution and develop a business plan. Also, consider adding supplemental coverages for unexpected events.
“The value in properly planning for uncertain financial times could mean the difference between a quick rebound and slow economic recovery for your firm,” Searles says.
1 See Christopher C. Shattuck, Law Firm Profitability During a Pandemic, Wisconsin Lawyer, July 2020.
2 For additional information, see Financial Solutions for Lawyers.