Your finances are the lifeblood of your business. It is critical that you understand your finances in detail. It is amazing how many owners of small to mid-size law firms, and business of any kind for that matter, do not understand some of the basic fundamentals of their finances. Here are a few tips to help you get a better understanding of your finances:
1. Understand and document your monthly expenses
a. What are my fixed monthly expenses?
b. What are my variable monthly expenses?
c. This will identify the minimum monthly billings required in order to fulfill your monthly expense obligations.
2. Detail your projected billings
a. What are my projected billings by month?
3. Detail your actual billings
a. What are my actual billings by month?
b. Compare your actual to projected billings on a monthly basis. Understand what has caused any discrepancy and adjust your strategies and projected billings accordingly. I suggest keeping historical records of your projected billings for analysis.
4. Detail your projected cash flow
a. This can be done in a simple spreadsheet with a column for date, a column for source of cash flow, a column for cash flow in, a column for cash flow out, and a column for balance.
b. This will identify in advance any situations where cash flow might get tight and will reduce the chance that you will get hit with a big bad negative cash flow surprise.
5. Detail your actual cash flow
a. On a monthly (or weekly) basis detail your actual cash flow and compare it to your projected cash flow. Understand what has caused any discrepancy and adjust your strategies and projected cash flow accordingly. I suggest keeping historical records of your projected cash flow for analysis.
6. Understand your required vs actual revenue / lawyer.
a. This is a simple calculation of required billings / number of lawyers.
b. Set individual billing targets accordingly.
7. Understand your required vs actual revenue / employee
a. This is a simple calculation of required billings / number of employees.
8. Understand your funds in trust
Once you have a good grip on your finances create a dashboard of “Key Performance Indicators” that will give you a snapshot of the health of your business. Review this dashboard on a monthly (or weekly) basis and adjust your strategies accordingly.
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