Navigating through the downturn

Issue Vol. 11 No. 1 January 2009 By Matthew Goldsmith

“Disaster!” “Meltdown!” “The End of Capitalism!” As we all celebrate the beginning of the new year, those headlines will endure as a reminder of how the last part of 2008 came to a close. While the daily stories about the newest drop in the market or the latest economic turmoil gripping the world have subsided, we still find ourselves living in a world where economic conditions are less certain and nobody is sure what the future holds.

For the self-employed lawyer or small firm owner, the economic situation can be a real concern. All business owners have questions about how the downturn may affect their business, but for the small firm owner, those questions can be more intense and personal. How long will the recession last? If it hasn’t yet affected your practice, will it? Will it affect your lifestyle? Can your firm or practice survive a recession?

These are all important questions not only to ask, but to plan for. Navigating your practice through difficult economic times isn’t easy, but it can be a lot easier and less uncertain when you take steps to ensure that you have a solid financial forecast and budget to help you make the right choices. Many small businesses don’t take the time to put together financial reporting until something inspires them to do it, and the recent economic turmoil is the perfect reason to start. There are several basic but very important things that every firm should do in order to ensure consistent financial health.

Have a plan

The most important tool in your arsenal is also the simplest tool — a plan. Many small firms have never had a reason to put together a financial forecast or budget. These two things are among the most basic and important financial tools you have at your disposal in managing the business side of your practice, and in making decisions about how and what to change when those decisions need to be made. A financial forecast and budget is basically a plan of how much revenue your firm will make over the next one to two years, and what expenses you will incur. A good plan should take your last two to three years of financial performance into account, and then look one to two years into the future. It can also be helpful to create two to three scenarios, or at least a best and worst case scenario. This planning will not only help you better understand your firm’s financial performance and health, but will also help you develop strategies to deal with different situations before they happen. Once you have these in place, tracking the performance of the firm to that budget or forecast can provide you with early warning signs that things may not be going as planned, allowing you to make important changes before it’s too late. Conversely, if things are going as or better than planned, it can help you capitalize on that success.

Be ready to reduce expenses

 Layoffs are one of the most common occurrences as soon as the economic environment becomes uncertain, and the biggest corporations are always the first to announce them. Why? Large corporations know that one of their greatest financial management tools is control over their expenses, and labor is one of the largest expense items in any company’s financials. Many corporations will announce layoffs as a precautionary measure to reduce expenses even before they need to. For the solo practitioner or small firm, layoffs may not be an option, and even if they are, you may not want to let key people go before you need to. What is important, however, is to have a complete picture of your firm’s expenses, when they will be incurred and what category they fall into. It’s critical to determine which expenses are absolutely necessary to keep your firm operating, and which ones could be reduced or eliminated if needed. Having this information at the ready makes it easy for you to make quick decisions when you need to, and can also generate significant savings for your firm.

Increase revenues

 Wait a minute, aren’t we talking about planning for difficult times, and preparing for less revenue? It’s important to remember that just because the economy is in recession, many firms will continue to do well and even grow. Your firm can be one of them. Consider your clients or the industry you serve the most — how will the economy impact them? Can you position your services to assist them with the challenges they might be facing as a result of a recession? By changing or adding to your marketing and matching your offerings to the economic times, you can better serve your current clients while potentially attracting new ones. After all, the best defense against any recession is to increase business!

OK — so now you know what types of tools you need in order to protect yourself and be prepared for an uncertain economy. The question now is, how do you put this information together? Larger companies and firms of course have a full-time CFO or financial analyst who can help put these things together. For the small firm or solo practitioner, it usually makes sense to seek the help of a professional who can help put together these tools and provide advice on how to move forward. There are some companies that provide outsourced “CFO” assistance, accounting firms that can put together the numbers into a digestible format, or small business consultants who can give you insight on how to move forward. While all of these options require some initial investment, it is a wise one in order to ensure you are protecting your business for the future. Most costs are incurred in the initial development of a budget or forecast, and the initial analysis that goes along with that. Once that is complete, the maintenance of that information is usually easier and much less expensive to keep up with.

Having a solid plan and being ready to react are your best tools to successfully navigate your practice through difficult economic times. Not only does it relieve you of concerns about the economic health of your firm, but it also allows you to focus your energy on what you do best — practicing law! Once you have these in place, you may also find yourself yawning as you sit down to read the latest disaster headline about the market, as there’s no need to worry — you’re ready for anything.

Matthew Goldsmith is president and founder of Goldsmith Business Consulting. He holds a B.S. in economics and an M.S. in international finance from Brandeis University. Before founding his company, he worked in corporate finance, including as controller, Middle Market Business Banking, Fleet Bank; and VP, Corporate Cash Management Services, Fleet Bank.