The Role of a Business Plan
A business plan is not just some meaningless piece of paper to appease your law school professor.
It’s not an exercise you complete shortly after you’re admitted to the bar.
It’s a guide. A guide for your law firm’s future and how you’re going to get there.
Having a business plan is one of the best ways to ensure the success and growth of your firm. It’s the difference between haphazardly stumbling through the next several decades of your career or implementing strategic decisions that will guide your firm for the long term success.
So why else do you need a law firm business plan?
Because it can help you attract investors and partners . You might be fortunate enough to have a large enough book of business that you’re able to start a firm where most of the income comes from you. But more than likely, if you want a firm that employs associates, paralegals, marketing and administrative staff, you’re going to need money. And the best and most credible way to attract that money is through a solid business plan.
Even if you’re never going to take on investors or partners, having a business plan still gives you valuable insight as to whether your firm is viable and sustainable. It’s a roadmap to success, while still allowing you the flexibility to make changes as you go.
You wouldn’t build a house without plans. Nobody would ever suggest starting to build a skyscraper without a plan. It’s the same with your law firm.
Essential Elements of a Law Firm Business Plan
Successfully obtaining a law firm business plan requires that the prospective candidate become familiar with its components and requirements. A law firm business plan is typically prepared and presented as a sealed document at the final interview stage. Firms expect the candidates to have spent quality time with the plan and generally will open the meeting by asking the candidate to present and explain the document.
A law firm business plan will be succinct and not exceed 12 pages in length. A few of its key components include:
1. Mission Statement and Summary
The mission statement provides an overview of the candidate’s practice (both its client and industry focus) and the value that this practice adds to the firm’s overall platform.
2. Financial Plan and Projections
This plan will identify the firm’s expenses, the source and timing of the funds required to meet these obligations, and its monthly cash flow projections and/or income projections for a 12 to 24 month period. This section may also summarize the candidate’s plan for developing work (i.e., leveraging its existing contacts, attending various bar functions and events, etc.) and/or highlight any prior experience in a law firm’s marketing department.
3. Support Staff and Personal Background
The plan should be aware and considerate of the firm’s internal rules and regulations (such as its restrictions on hiring contingent staff, etc.) and provide a realistic self-assessment of the support staff that the candidate is accustomed to using within his/her practice. This section should also provide a brief overall professional background (including schools attended, bar admissions, industry focus, and any legal publications authored) and personal information (such as spouse/children), along with the candidate’s professional and personal accomplishments, political affiliations, outside interest, and memberships.
4. Personal Financial Statement and Gross Revenues
The firm will frequently require that a certified personal financial statement accompany the proposed business plan. The plan will summarize the attorney’s monthly cash inflow and cash outflow (including the amount expected to be received from contingent cases). The plan should be specific and itemized (e.g., it should differentiate between a Home Depot or Nordstrom charge card as compared to paying $2,400.00 per month for a mortgage/lease payment on a home or apartment). The plan should also detail the nature of any liquidity sources (such as a parents’ ability to help financially, etc.) and assets that would be available to support a shortfall.
5. Marketing Budget
The budget should be realistic and specifically identify the types of events that the candidate will commit to participate in. The budget should be general in scope and address both the anticipated gross revenues and the net realization of those revenues through the course of the year. Typically, the firm will be more interested in comparing the annual gross revenues on the plan with those identified on the candidate’s resume. The budget should also reflect any anticipated changes in a net realization rate (such as increasing realization due to reduced write-off) attributable to various factors (such as spending more time in the office than on the road, etc.). Further, the plan should be conservative in anticipating growth, but aggressive in identifying the work that will generate this growth. For example, new hires typically assign themselves a higher bar hour requirement and then gradually decrease this goal thereafter. Since many firms do not use a formal scale for writing down hours, the firm will expect the candidate to use a high target for writing down its hours (such as a 50%) and then decrease this target over time (i.e., a 10% write down in year two and a 5% write down in year three).
Defining Objectives and Goals
While the language you use to describe your objectives and goals is important, more important is contemplating the specific objectives and goals that will contribute to your practice being your ideal version of itself. For example, might your office accomplish a 33% higher revenue level if everyone answered the phones with a score of 5-7 instead of 1-3? If so, you can set a goal of having everyone trained to respond to calls in a similar manner and obtaining a 5-7 measurement in two months. Then, you can ascertain on a weekly basis whether your goal is being achieved and, if not, take corrective action.
Be specific. It’s not enough to say, "We’ll increase our top line 10%." How much new business do you need to bring in to achieve this goal? You can calculate the requirement by factoring in the average retainer amount and the number of individual cases/terms of representation your office handles. Or you may figure it by comparing your top line last year to this year. Understanding the particulars of your top line will help you know exactly what it must be to achieve the annual objective and how to achieve it.
Similarly, how will you increase the bottom line? What is your average cost of sale (COS)? At some point, your COS can become excessive, preventing you from generating necessary profit. One law firm’s COS was about 40%, which is an acceptable number generally, but it was between 60-90% to individual attorneys’ numbers. That was a red flag that something needed to change.
The goal is to go down to as close to 40% in the next 12 months as possible. You can increase efficiencies and profitability in your files, for instance, by selecting the right cases and closing or converting all others.
Conducting a Market Analysis and Identifying Your Niche
Market analysis is a relatively straightforward process. The first step is to list your existing customers. Then, you need to identify the most likely new customers for your company and list these groups. From there, you should list your competitors and determine their market position in relation to your own. Finally, document how you intend to outsmart your competition. This process is not as easy as it seems, especially if your competitors happen to be national companies with huge marketing budgets and the ability to spend thousands to even hundreds of thousands of dollars on a single billboard.
Identifying a niche for your law firm can be the best way to set yourself apart from those monsters. A niche is a specific segment of the market that you will target. However, a successful segment must contain specific requirements. The first step in identifying a successful niche is to research and analyze the demographics of your target audience. Next, you need to research the spending habits of this target audience. With this information, you will be able to determine how much of your time and resources you should be investing to target this audience. By targeting your audience, you will be able to maximize your profits.
Strategy Development: Marketing and Client Acquisition
The next step after determining what type of firm you are and which clients you will seek is to develop a marketing plan that describes how you will acquire those clients. This can take many forms, such as:
Your marketing plan should always include a discussion of your online presence, and how you will use your website, blogs, Facebook, LinkedIn and Twitter to build your practice. Many attorneys in solo practices or small firms build their practices almost exclusively through their online presence.
Of course you also want to include your referral sources such as accountants, bankers, financial planners and other attorneys in your network to whom you can refer business in return.
Finally, you want to describe how you plan to obtain speaking engagements at networking events, seminars, and webinars to introduce yourself and your firm to potential clients.
A well-crafted Business Plan is an integral asset to your firm, not only for the present but also as a guide for the future.
Financial Planning and Budgeting
It is vital that you project anticipated expenses and revenues. Analyzing these figures provides you with the information you need to effectively market and manage your firm to achieve success. The goal is to build a budget and then stick to it.
The costs associated with law firms vary widely based on location, size, practice area, and a number of other factors. However, it is possible to determine what it is estimated that you will spend each month on overhead. Then you can forecast what revenue you expect to generate, based on the cases you have and those you are actively pursuing.
Does it sound difficult? Well, you probably have a handle on your expenses, at least from an overview perspective. List all of your expenses and then put them into logical areas: When it comes to revenue, you will note that your income varies from month to month. Some clients pay late, and there are always gaps in the schedule when clients just don’t call or show up. There are also other factors that can make predicting how your firm will perform difficult, but that shouldn’t stop you from making predictions to the best of your ability.
By looking back over your records for the past several years (three to five years if you have been open that long), you can estimate how much you will be able to spend for the coming year as well as how much revenue you will be able to generate. You can always edit them if you find more information before the budgeting process is complete .
Step one is to take out your completed financial statements for the last three months. If you do not have them, go back and complete them for the last three months. Once you have completed the statements, you will need to review them to find the following; Take these figures and average them over three-months. This will give you a realistic view of your information. This process will produce a profit or loss statement for each area of your firm. Once you have averaged your information, you are ready to create a cash flow statement. A cash flow statement focuses on the flow of cash in and out of your business as opposed to a profit/loss statement. This statement will focus on bills and client payments and will include attorneys’ fees, trust accounts, expenditures, and revenue. In addition, you will need to include all of the unusual areas that could impact your income as well as your expenses.
To create your budget, you need to do the following: Once you have completed your budget, you will have a solid financial plan for the upcoming year. Keep in mind that things can change, but having a realistic budget will help prepare you for any changes, whether they have a positive or negative impact on your firm. Lawyers, in fact all business owners, that do not create budgets for their firm are often caught by surprise when their income drops. By creating a budget, you will be able to prevent or minimize your exposure to a negative cash flow.
Law Firm Operations and Management
An essential part of any law firm business plan is the operational structure – how the office will be managed and how work will be delegated and done. This section may start with a broad organizational chart, showing what managers and staff positions there will be and how they relate to one another. For newly formed firms, this will be an "as-the-firm-grows" view because in most cases, you will do all of the managing yourself at the beginning.
Your title may be "Senior Partner" or "Owner" or "Managing Partner" – but the day to day operation of the law firm will require a more hands-on approach than simply telling other attorneys what you want them to do. Even if you’re the only attorney at the firm, you will still need people to help you do the work so you don’t spend all your time doing administrative tasks and can get out their marketing or billing.
This means a lot of decision making about what to delegate and to whom, as well as determining the best way to apply the resources you have available – staff, equipment, services, space, etc. Even the most simple of offices will need some outside services, so your plan should include who those vendors will be. You will also want to include your plan for the workflow of information through the office, and how people will communicate with each other and with clients.
Management and staff is one of the more complicated sections of a law firm business plan, so even though it can seem overwhelming, try breaking it down into smaller parts and concentrate on each one separately, then fit those parts together again to see how they work in the overall scheme of things.
Risk Management and Compliance Issues
Law firms operate in a heavily regulated industry, and it’s essential to have a comprehensive understanding of applicable regulations and laws. As a result, a well-defined risk management strategy is crucial to avoid liabilities, lawsuits, and other major setbacks. Though you may not directly interact with regulatory agencies or go through audits regularly, you should keep up to speed with developments in the laws, rules, and regulations that govern your operation and are relevant to your law firm. This includes business operations and the practice of law in your jurisdiction, as well as any trusts or other fiduciary responsibilities. Risk management is the proactive process of identifying and addressing risks in an organized manner through a series of risk evaluations and responses. Risk management and compliance create the foundation for ongoing success.
Reviewing and Revising the Business Plan
Failing to consistently assess and update your business plan is a crucial error among practitioners. When a business plan is created, it is essential that the document and process is viewed as dynamic. As the firm responds, adapts and reacts to changes in the industry, the business plan should be updated to reflect those changes. Evaluating the business plan on a quarterly basis allows the business plan to maintain relevance and provides up-to-date information to guide the firm into the future. Additionally , monitoring progress on initiatives that enhance the firm’s marketing goals and professional reputation is crucial to the implementation of the business plan.
The law firm that invests the time and money to produce a clear business plan that aligns fundamental business principles with legal expertise recognizes the importance of regularly assessing their performance. Conducting an audit on the business plan quarterly, charting successes, lessons learned and challenges, the law firm can create a document that will promote consistent growth, bottom-line revenue and the firm’s image in the community.