There are a lot of articles and advice about forecasting your law firm revenue starting off in practice. The problem with all of these methods and suggests is that each is nothing but a wall-eyed guess. Some might call these educated guesses, but I can tell you from experience that the main reason for undertaking this exercise is to delude yourself.
There are an equal number of articles about how to present persuasive financials concerning the estimation of earning in the future. But, this is really just a process for deluding others from whom want something such as a loan.
The operative word here is dream. Not fact. Not reality. But, a delusion. Imagination. An aspiration. A wish. A notion really, and nothing more.
Sometimes the vagary or speculation is too low and the real earnings are higher, but most often the reverse is true.
If you are starting out in law or in a new law practice, you need to feel enthusiastic about your prospects. However, rank speculation is a problem because it sets expectations that can only be disappointing. It results in a lawyer feeling miserable. It results in bad decision making once you are in the game. It can lead to bankruptcy or creditor phone calls that can be upsetting.
By bad decision making I mean that decisions are made to purchase things that do not need to be purchases, marketing choices that are too expensive and ineffective, work habits that are not reasonable, and all because you have convinced yourself in the reliability of your voodoo. Worse, you have probably convinced others as well, such as bankers, credit card companies, loan sharking companies, your 401(k) administrator, landlords, book salesmen, seminar companies, your family and the like. Worse yet, you find yourself in debt and out of money based upon your purchasing decisions for the precise reason that you came to rely on your voodoo.
It is called "pre-revenue" and it concerns analysis of where you are starting and where you will end up. Do not get me wrong, planning is not all bad. In fact, it is necessary. Agreed, most of the decision to move forward is based on faith or a general good feeling in your abilities. But, most of pre-revenue planning is simply out of your control.
When it comes to pre-revenue planning please know there is only one part of the equation you can control, and that is your cost and overhead. If you do not delude yourself on the first part of your equation, then you will control your bad tendencies to overly debt and spend yourself silly in the pre-revenue stage based upon your speculation.
The secret to your pre-revenue considerations is that you cannot predict with any accuracy what revenue will be. You can figure out, however, with pretty good accuracy minimally what your overhead and debt will be. If you readily admit the risk you face in terms of revenues and hence failure, then you will not delude yourself into what you cannot afford in terms of overhead.
Who in their right mind would obligate themselves for real money or overhead if they believed they would not be earning much money and did not know when they would start earning enough money?
The point is that although we cannot tell how much we will earn, we can place a baseline on our burn rate when starting out. The less the burn rate the more likely we will start out okay. The less we imagine earnings, and rely more on how badly we want to do what we want to do for personal satisfaction reasons, the more we will struggle early on to control the burn rate. Also, generally speaking, the less the burn rate now, the more the earn rate later. It is really that simple.
If you will avoid this tendency to create overhead in all forms so you can justify what you need to achieve, and avoid this "if I only had so many cases at so much a case it would only take X cases per month to succeed", then you will likely not debt yourself up starting out.
The less certain you are of earnings, the more diligent you will be in not going overboard. If you wanted to practice law but did not know when or how you might pay overhead, you would strive mightily to avoid rent, staff, new furniture, expensive telephone system, costly marketing schemes, and other luxuries. (Yes, I called them luxuries, and you need to pay for luxuries with cash and not debt. And yes, things like leases and contracts are debt.).
So, to recap, earnings are totally unpredictable. Faith in yourself prevails, but you do not need to delude yourself. You can, however, predict and control your overhead and debt starting out (those things that drain you and prevent your success and harm your good state of mind).
Nice analysis. With revenues so unpredictable, it is extremely important to tightly control expenses in the early stages.
Posted by: Sherman Texas Attorney | May 17, 2010 at 10:14 PM