Data-driven financial management and planning

According to LPM Frontiers 2023, SME law firms said they wanted to be more data-driven in decision-making. Daniel Gulliver, head of finance at CFG, details how he uses data for his firm’s financial planning.

Our financial management of a Legal SME specialising in serious and catastrophic injury focuses initially on three fundamentals: long-term planning, utilising data and a high level of transparency for the various stakeholders. While planning needs will vary due to size, work types and aims, these three fundamentals should still apply.

Long-term planning

Modelling covers five financial years including the current one. This may seem a lengthy timeframe but one that is appropriate given the ambitions of the business and the typical case lengths involved in serious and catastrophic injury work. It’s particularly important for any legal business to understand it’s potential growth in lockup over the longer term.

Data

The definitions and descriptions of ‘data-driven’ financial strategy are easily searchable on the internet, and data if used correctly is a very valuable tool in most areas of law firm management. For the purposes of this comment piece and the parameters that I work within, I generally use data for two purposes. Firstly, understanding how cases have been worked and should be worked going forward and secondly, as an integral part of ‘real time’ forecasting.

Measuring and understanding case milestones, case durations, recovery rates, fee earner mix, WIP and disbursement build according to your case value bands are just some examples of where the use of data can and will bring efficiency, better margins and most importantly provide the best outcomes for clients.

Added to this understanding of how a case should work is our approach to projecting settlement dates and settlement values on all live cases. These are updated by fee earners in conjunction with their supervisors on a regular and ongoing basis on our case management system and that data feeds directly into the forecasting model. Given the number of factors that can affect these projections it is certainly advisable to build in appropriate sensitivity around these forecasts.

This supply of ‘live data’ allows the business to understand both the short term and long-term picture in terms of the main measurables – outlined in the Summary.

It goes without saying that the quality of your forecasting is only as good as the quality of the data going onto your systems and in turn into the modelling.

Transparency

Both planning and the focused use of data feed into the third fundamental of transparency. Whether it be funders, owners, the leadership team, or colleagues within the business, the more clarity we provide around relevant performance and ongoing forecasts the better. The key aim being to give the different stakeholders the pertinent information according to their role or interest.

Challenges and use of key priorities

While the three areas covered above should give a platform for good financial management and planning there will inevitably be challenges to deal with and work through.

Most law firms, and certainly those that are heavily weighted towards personal injury work will need to prioritise their management of cash and lockup as previously mentioned. Lawyers have not traditionally been comfortable with the well-used phrase “cash is king”, but the importance of that message remains.

The modelling I have referenced should give you a picture of the lockup/cash challenge that confronts the business as it aims to grow. If a business takes on too many cases in a short period of time or its cases are too long to settle and generate cash, then clearly it will start to see a direct correlation between WIP growth and cash spend leading to working capital challenges.

To maximise or improve cash flow efficiency in a sector where payment cycles work against you, it is vital to focus in on a small number of appropriate key priorities which all colleagues are aware of and buy in to – again transparency and clarity is key. These may include pre-settlement interims, case durations, an efficient and proactive costs process both before and after settlement. Again, the priorities may differ according to the type of law firm but the principle of key areas of focus holds true.

Peter Drucker’s phrase “only what gets measured gets managed” is appropriate. Basically, keep the right data in front of the right people all the time and ensure it is acted upon.

Summary

Hopefully you have seen the thread of the three fundamentals running through the financial management process. Driven by good quality data and its appropriate use,  your planning should enable you to build a forecast of where you want to be (and where you can be) in terms of income, pace of WIP build, expenditure, profit, lockup, cash requirement and movement, margin, fee earners needed and tangible net worth.

Try and keep your planning and data ‘live’ and make sure everyone has clarity on what is important.