It’s no secret that lawyers often feel uneasy when it comes to numbers. Performing annual budget reviews and financial year planning can be a dreaded task.
However, setting budgets and implementing processes for predictable legal spend is more straightforward than one might think. This article presents practical strategies and tips for establishing an initial budget forecast and effectively managing that budget throughout the year.
CEOs and CFOs are well-versed in profit and loss statements (P&L) and cash flow forecasts, but the effectiveness and accuracy of these rely on sound practices for forecasting future spend. The legal department’s costs can quickly be scrutinised if they exceed expectations. While some legal projects may be genuinely unexpected, having a robust approach to budget setting, along with documented assumptions and collaboration with the finance team, will help navigate these challenging conversations.
To ensure effective cost and budget management, it is recommended that General Counsels create an annual budget for external legal spend. Two common approaches to establishing a budget are the ‘top-down’ and ‘bottom-up’ methodologies, each with advantages and disadvantages. Best practice suggests utilising both methods, analysing and comparing the results before finalising the budget.
Once the resulting budget estimates are ready, review and compare them, and involve your finance colleagues in the analysis before finalising the budget number and accompanying assumptions. While budgets may require adjustments throughout the year due to changing events, having a clear budget will help manage spend effectively and provide a goalpost against which to track progress. Furthermore, a robust budget with agreed assumptions will help guide decision-making and support challenging stakeholder conversations.
While starting the financial year with a robust budget is crucial, it’s essential to acknowledge that spending fluctuates throughout the year, and unexpected legal issues may arise. Tracking the actual and forecasted spend to the budget is still possible and expected by most CFOs. This can be achieved by keeping track of the following:
By utilising this information, the General Counsel can generate reports that track actual spend and committed spend against the budget and variances in scopes, including reasonings, providing the necessary transparency and predictability. This builds trust and confidence within the organisation, enabling stakeholders to make informed decisions based on reliable financial projections. Ultimately, this fosters stability and success.
Tip: Legal technology solutions can streamline and automate the data capture and reporting of this information along with visual reporting dashboards
While establishing a robust budget can seem daunting, lawyers can employ practical strategies to navigate this process successfully. By collaborating with the finance team and utilising both top-down and bottom-up approaches, a comprehensive and accurate budget forecast can be established.
Additionally, maintaining transparency and predictability throughout the year by diligently tracking engaged matters, budget changes, and invoices received is vital. This financial oversight builds trust and confidence within the organisation and enables informed decision-making based on reliable projections. By embracing these practices, General Counsels can effectively control costs, track progress, and contribute to the organisation’s overall success. With a well-managed legal department budget, a stable and financially sound foundation can be established, fostering efficiency and strategic decision-making.
Adopting a best practice approach to outside counsel management will enable legal teams to manage costs and risks better, enhance service delivery, ensure strategic alignment, and demonstrate value. Download an unrestricted copy now.
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