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Budgeting and Cash Flow
by Barbara Lewis MBA and Dan Otto MBA

In a presentation that Centurion Consulting Group partners gave to law firm administrators, we mentioned the importance of budgeting and cash flow. Throughout the audience there was a ripple of laughter. When we questioned the attendees about the source of this comedy, we discovered that in the audience there was not one law firm that had either a budget or cash flow projection for the year.

You would be hard-pressed to find any of the law firms’ clients who had not developed a budget or cash flow projections on an annual or quarterly basis. And moreover, it would be remiss for the corporate attorney to be counseling clients and not insisting that they have budget and cash flow projections. Studies indicate that the number one reason why businesses fail is a lack of cash flow. Projections go a long way toward ensuring appropriate cash reserves.

Take the law firm without a budget or cash flow projections. Every year for the past several years during the first quarter, the partners panic because there is insufficient cash. Billable hours are down every November and December due to holiday vacations. Therefore, the cash coming in the door is going to be less during the 60 or 90 days following low billable hour months. Yet, at the end of the year, the partners have, historically, removed all the cash from the law firm and divided it   among themselves for year-end bonuses. Consequently, when the first quarter comes around they are in such a cash bind that they discontinue draws, contemplate laying off employees, cut necessary expenses and spend valuable time examining a myriad of other options in an effort to improve the cash flow squeeze. The atmosphere is tense and stressful.

Yet, proper planning can enhance the cash flow situation, especially if you have a budget. The budget can easily be developed through the use of historical information on what your firm spent during the past five years on various expenses and the monthly trends of those expenses. Similarly, an analysis of historical income trends, coupled with the budget, can help estimate cash flow requirements. There are many organizations that provide data on what your expenses SHOULD look like compared to revenues, including the IRS, Dun & Bradstreet and other companies that provide financial surveys from law firms. By comparing your expenses to other law firms your size, you can determine whether your expenses are in proportion to your revenues.

The health of your law firm and peace of mind of your partners can rest on developing a budget and cash flow projections.

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