Income and Cash Flow Projections for Law Firms: Close Out the Year With Confidence
Year-End Financial Tips for Law Firms: Part 1
As the end of the year approaches, law firms must turn attention to communicating their expected financial results to all impacted. This could include partners/shareholder, CPAs, accountants, banks, co-counsel and any other parties that may be impacted by the firm’s financial performance . One of the most crucial aspects of this process is accurately projecting income and cash flow. This step not only sets the stage for sound financial management but also directly impacts partner compensation by providing everyone with a clear view of expected earnings.
In this first article in Barto Consulting’s series on year-end financial tips for law firms, we discuss why projecting income and cash flow is essential and how firms can approach it for optimal results.
Reconciling Accounts: The Essential First Step
A successful year-end projection starts with a comprehensive reconciliation of all bank and balance sheet accounts for precise planning. Reconciliation ensures that the current financial position is accurately represented, offering a clean slate from which to make realistic projections. Adjustments made after this process can significantly impact income assumptions, underscoring the importance of having a firm grasp on all accounts before diving into planning. This step builds a foundation of trust and accuracy upon which reliable projections can be based.
Tools of the Trade: Income Budget vs. 13-Week Cash Flow Forecast
Once the law firm’s financial starting point is established, it’s time to use a set of tools that provide the most accurate view of what lies ahead. Two critical documents in this process are the income budget and the 13-week cash flow forecast. While they may seem similar, they serve distinct purposes and complement each other in projecting both income and cash flow.
- Income Budget: This budget includes all revenue sources and deductions, regardless of their direct impact on cash flow. For example, non-cash items like depreciation affect net income but don’t influence cash on hand. By incorporating these items, the income budget provides a full picture of expected profitability, which is essential for planning overall financial health.
- 13-Week Cash Flow Forecast: Unlike the income budget, the 13-week cash flow forecast zeroes in on actual cash movements. This forecast includes activities that impact cash flow without affecting net income, such as client costs advanced or repayments on a line of credit. By focusing on cash activity, this forecast gives a realistic view of what funds are available in real time, ensuring the firm remains financially stable and capable of meeting short-term obligations.
Using both tools together (they can be combined) allows law firms to anticipate their year-end position with accuracy, while also considering cash-specific factors alongside traditional revenue and expense projections. This dual approach helps build a complete financial picture, from profitability to available cash reserves.
Partner Compensation: Ensuring Fair and Predictable Payouts
For law firms, year-end income and cash flow projections play a pivotal role in communicating partner compensation. Accurate projections help ensure that partners are not surprised by their compensation at the end of the year (or after it ends) and that the firm’s finances are strong enough to cover year-end draws without overextending resources. This process is particularly important for small and mid-sized firms, which typically maintain lower capital levels than large firms.
By preparing and sticking to consistent projections, especially at the end of the year, firms avoid the common pitfalls of changing or delayed payouts, a situation that can erode partner trust satisfaction. Instead, predictable draws reinforce the firm’s commitment to transparency and stability.
In the end, consistency in partner compensation reflects positively on the firm’s reputation and contributes to a culture of trust and reliability. Partners can count on the firm not only to manage its finances responsibly but also to plan thoughtfully for their compensation, allowing them to manage personal finances and tax liabilities effectively.
Year-end financial planning can seem like a daunting task, but a focused approach to income and cash flow projections simplifies the process and supports the law firm’s financial health. By reconciling accounts, leveraging the right financial tools and focusing on managing communication regarding partner compensation, law firms can create a stable, predictable financial environment. This approach reassures partners, strengthens a culture of financial responsibility and prepares the firm for a strong start to the new year.
If you have questions about year-end financial planning at your law firm, email Barto Consulting Principal Consulting and Founder Derek Barto so that he can help you get your law firm off to a great financial start in the new year.
