Beyond Budgeting

For many firms September represents the midpoint of the financial year and is a good time to review the firm's progress against its budgets.

Ironically (encouraged by the Lexcel and LSC franchising), annual budgets have become a key part of law firm financial management at a time when other sectors have moved "Beyond Budgeting", often into Quarterly Rolling Forecasts (QRF). This is because the business world has become so unpredictable that a budget conceived a year earlier can have been overtaken by events, and no longer be meaningful.

Focusing Attention

The usual approach to QRF is to set detailed targets/forecasts for no more than six individual months and to set quarterly targets/forecasts on an outline basis for the succeeding 6 to 12 months. There are two advantages to this approach:

• It focuses the main attention on the nearest time periods, for which people can be held properly accountable, and for which there should be few acceptable excuses for non-delivery

• It starts the process of thinking about the significant issues which could affect the firm's prospects earlier. The risk of nasty surprises is reduced, contingency plans can be put in place if risks are seen, and preparations to take advantage of new opportunities can also start earlier.

Some larger firms have been using QRF for the last couple of years, but their approach has been too complex for medium-sized firms.

Minimise Risk - Plan Early

I advocate a simplified QRF approach in those clients who have been making significant changes to their practice. Given the extent of changes which are likely to occur in April 2013, especially in Personal Injury and Legal Aid, far more firms should be using a QRF now. It could be very risky to leave the financial planning for the 2013 – 14 financial year until next spring.

I would suggest that the following approach should help many firms get on the right track:

• Test whether the current year budget is still credible. Take the results for the half year to date and double them. If the answer is close to budget, move on to next year. If the answer is less than budget, bearing in mind the state of the economy, the legal market, and the firm, ask the partners concerned to justify why they feel that the second half-year is likely to be any better.

• Ask each partner to spell out any significant changes which are likely to occur in their market within the next 12 months – and what results they would expect in the first half of next year if we do nothing. If the answer is satisfactory and little changes expected, the forecasts for the first half of next year can be very similar to this year's actual.

• If significant change is expected and either risks or opportunities are foreseen (and for many firms the risks are manifold) it is time to start putting action plans in place now, and potentially preparing both Plan A and a Plan B version of the quarterly rolling forecast for the next 12 months.

• In the current market much can change over the next few months, and a repeat of the quarterly process at Christmas may provide more early warnings of the prospects for next year and allow plans to be tweaked and any necessary actions to be taken in time.

There can be no simple panacea for the challenges in the emerging legal market, but keeping a regular watch on the medium term future will maximise a firm’s chances of avoiding the icebergs which lie ahead.