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Improved Revenue Forecasting

By Norm Mullock
November 01, 2004

Paramount among the many analytic challenges facing Law firm CFOs and their financial staff is accurately forecasting cash. Relying on the law of large numbers, most firms assume that prior averages will hold, so they use history-based, firm-wide performance ratios to obtain cash flow projections.

Simplistic Forecasting

Accurate information is essential for effective forecasting, however, and historically many firms have taken a simplistic approach to getting at this information:

  • They determine work value by timekeeper (number of hours x standard rate).
  • Then they apply realizations (amount billed against standard, amount collected against amount billed) to determine the collectable work value.
  • At this point, a number of variations on essentially the same approach are used. Prominent among these is to spread this collectable value across the previous year's collection pattern to derive budgeted collections.

For example if we budget $100 million of work value at standard, historically bill 96% of standard, and historically collect 98% of billings, then we will budget collections of ($100 million x .96 x .98) = $94 million. If in January of this year we obtained 10% of our annual collections, we will budget collections for January of next year at $9.4 million.

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