A lot of economic experts have started talking about the “R” word — recession — lately. It’s scary out there, but that doesn’t mean that your law firm can’t be prepared to take on this economic cycle in stride and even thrive during an economic recession.
Let’s take a look at what you need to do to prepare your law firm for a recession.
No Fearmongering Here
Look, I am not trying to make you fearful of what’s ahead. We all hope that there is not a recession or worse, because we all understand that it means a lot of pain for a lot of people.
But we want you to be in a position to not only survive this for yourself, but to provide help for a lot of people that are going to be hurting. From our employees that need the job to our clients that need our help, there are a lot of people depending on us to have strong stable law firms.
And most of the advice here is applicable to the good times as well as the bad times. Running a lean, mean law firm is a good thing when the economy is great. But it is a matter of survival when the economy is suffering. So take these lessons forward from recession to recovery. Work the fundamentals so that your firm is strong, no matter the macro or micro environment that you are working within.
Start with Good Books
If I say it once, I say it a million times – the foundation to your financial plans, blueprints, and action, all starts with good books and records. This means that your bookkeeping needs to be kept up-to-date and accurate.
Garbage in leads to garbage out. If you don’t have good bookkeeping data, we cannot make good strategic financial decisions for your law firm.
The first step, recession or not, is to have good bookkeeping. Accurate records though become more critical when you are working in a crisis. You will need to make critical decisions fast, from hiring to firing, collecting AR, extending leases, adding or subtracting practice areas. So get and keep your books up to date!
Stay on Top of AR
I’m putting accounts receivable near the top of this article for a reason. During a recession, your cash flow is going to be the difference between death and survival, not to mention survival and thriving. Cash flow starts with your accounts receivable.
Whether this means that you are taking more payments up-front (just don’t get in the ponzi scheme where you use that to pay for current expenses) or you have payment plans, making sure that the clients are paying will be key.
Also, if you have never taken credit cards before, now will be the time to consider accepting them as a form of payment. And while we hate seeing that “merchant fee” line on the income statement, we all would rather have 97% of the payment rather than 0% of the payment. If credit cards are the difference in getting paid or not, then take the credit cards and eat the fee.
P.S. Did you see my recent post on insights about credit cards in business on LinkedIn? Take a look to see how credit cards are being used in business and how business owners will use them as a tool for cash flow.
Build and Follow a Budget
When times are easy, it is often tempting to get a little more lazy about following a budget. But during a recession, you need to be following a budget. One that you know puts you in a safe zone financially.
Excessive or unnecessary spending is not going to get you through a recession, unfortunately. This is the time when we want to be lean and mean. We will still invest in necessary expenditures, and that includes our staff. But at the same time, you want to be very strategic in how you decide to spend your money.
When times are tough, you want every dollar you spend to be bringing you more revenue or reducing other expenses. So, for example, we want to closely follow our budgets for compensation plans and not give out excessive discretionary bonuses. We need our marketing budget to be getting us not just calls but paying clients. We need to reduce redundancies in our tech stack (for example, how many of us have paid plans for Zoom, Teams, and Meet? Do we really need all three of them?)
Review the Budget vs Actuals
During our monthly Fractional CFO calls, I check in with my clients to compare their actual spend versus their budget. We go category by category looking for variances, in revenue and expenses. We want to make sure that not only do we have the budget but that we are following it.
When we do find variances, we try to determine why. Maybe we had an opportunity that we didn’t account for in the budget, and we took it. But that is an intentional decision.
If we can’t figure out the cause of the variance, we start watching that category really close, looking for trends. We will go back several months and then watch it for the future. These variances are our early warning signs that something in our budget and our firm is not working right or as expected. Now, we hope that they are for the better, but we need to watch them.
This is a great way to find operational efficiencies and double down on what is working. It’s also a great way to find what’s not working and make course corrections before we go too far down a road that is just wasting time and money. Things that are critical during a recession.
Obtain Financing Sources
The best time to obtain credit is when things are going well. So right now, before the recession officially hits, look to be getting new or extending lines of credit and even credit limits on credit cards.
Most financial institutions will give you financing with limited underwriting for smaller lines of credit or credit cards. However, these often come with personal guarantees from you as the law firm owner. The larger lines of credit will require more extensive underwriting, which will include a review of your financial statements. Remember when I said that the first step to surviving a recession was to have good books? This is part of the reason why.
Several of my law firm clients are currently working on extending existing lines of credit. It’s not always a fun process, especially if your prior year return (2024) hasn’t been filed yet. But you can get it done.
It’s always good advice to have credit available, but during a recession, it can be the difference between staying in business and shutting your doors.
Up Your Business and Personal Savings
While having credit available to float you during down periods, it comes with a significant cost, in the form of interest payments. Meanwhile, if you can basically self-finance, that’s even better.
So if you are looking at your practice and seeing that you are little low on savings, it’s going to be time to up that.
How much do you save? That’s going to be a big “it depends.”
Many firms have consistent cash flow and don’t worry too much about things. They find that 1 month is sufficient. So going into a recession, maybe we up their savings to two months of expenses.
Other firms are a little more sporadic or even seasonal. If you have a high customer concentration risk, then their delay of 30-60 days paying you could be disastrous. For those with inconsistent cash flow, their normal savings is likely closer to three months. Going into the recession, maybe we raise that to six months cash on hand.
Take Advantage of High Yield Savings and Other Opportunities
Typically, we don’t want this savings to be held in our operating accounts (and definitely not our trust accounts). The money isn’t working for us at all. So we can look to other options for the bulk of our business savings. Options like high-yield business savings accounts, money market accounts, CDs, and short-term near cash investments with very low risk.
Remember, this is not your get rich fast investment fund. This is your emergency savings where investments should carry very low risks of losing value. The worst thing would be for you to need the cash for operations, but the investments are down, leading you to be short on what you need.
Don’t Neglect Your Personal Savings
While we are focusing on the law firm, as the owner, you should also be upping your personal savings and cutting spending on your personal budget as well. Having a low cost of living personally is going to help you survive the firm’s lean times much better.
When things are tough in the firm, you may have to not take money out for a period of time. This could mean reducing or completely going without your distributions or even your paycheck (if you are an S or C-corp). Personal savings are going to be key.
And there may come a time when you have to put more money into the firm just to pay payroll or rent. This money may be from your savings or your personal credit lines. But having those funds in savings will go a long ways to helping you sleep easier during rough times.
Align Your Staff Incentives with Firm Goals
When times are good and we aren’t worried about money, we can afford to be more generous with our staff compensation. When times are tough, we have to be tighter with the bonuses.
By no means do I want you to stop giving out bonuses. I want you to help your employees, but I also want you to align those bonuses with positive firm outcomes. New client referrals, large case settlements, higher billable rates. Efficiency both at their own position but also in delegating tasks to other team members. Excellent leadership.
When we align the incentives to these positive outcomes, everyone wins. While we should be doing this all the time, it is more important than ever that we make sure our compensation plans are built with firm profitability and stability in mind.
Focus on Client and Referral Relationships
Each and every client is valuable to a law firm. But during a recession, those relationships are what will help your firm survive.
Having good, paying clients that will stick with you even when times are tough are like little diamonds in the rough. We want to encourage these relationships.
But not all firms have repeat clientele. After all, we really hope that clients aren’t getting married and divorced every year (but at least they will know to get the pre-nup the second or third time around). These firms need to really cultivate those referral relationships.
Who is sending you business without having to pay Google for ads? These are people that you want to really build and maintain excellent relationships with.
Diversify Your Practice Areas
Some practice areas just do better during a recession than other practice areas. This has always been true and will continue to be true.
In my career, I have spent a lot of time on unclaimed property and still work with many companies on their compliance and audit defense. Since unclaimed property is not technically a tax, states have traditionally ramped up audits and enforcement actions when state revenues are down (because people aren’t making as much money for income taxes).
Another practice area that is popular during a recession is bankruptcy. As people fall on hard times, they often look to bankruptcy for answers. Similarly, firms that specialize in turnarounds and distressed companies can make really good money during a recession.
During recessions, people tend to be more likely to file personal injury claims, especially against companies that have deep insurance policies. So firms on both sides, plaintiff and defense, will often see more work during a recession.
The key is to make sure that the practice areas you add will have paying clients. Or if you take them on contingency that the other party has a means to pay the judgment. You may find that an area like wrongful termination (government claims excepted) have a lot of defendants that won’t be able to pay judgments, even if you are successful on the merits. Collection, and thus your payment, may be limited.
Automate for Efficiency
During a recession or any lean time, you have to do more with less. We hear it all the time as people talk about corporate jobs – one person is doing the job of three people. But that also creates a recipe for its own disaster – low employee morale, high staff turnover, and decreased client satisfaction.
So while we want to do more with less, we want to do it efficiently. And no, I don’t mean in the DOGE way. I mean in the actual real sense of the term.
This is where your law firm’s operations will be key. Have you used technology to its fullest extent? At a minimum, have you standardized and documented processes, templated forms, and automated document creation? Have you integrated your practice management with your accounting and CRM tools?
Investing in technology can save you a lot in manpower. Investing wisely here can result in multiple returns over years and years to come, even when we come through the other side of this recession.
Prepare for More Competition
As times get worse, even lawyers will get laid off from their current jobs. This may mean that they start their own competing law firms, competing for the same clientele you are.
How do you hold off these upstart competitors? You use your experience to its upmost advantage, ethically and legally, of course.
You showcase in your marketing that you have the experience necessary to quickly identify and solve problems. You build out a ton of whitepapers, blog posts, and videos that you can share with your potential clients. You have prior clients give testimonials on how you helped them. You showcase your wins when you are legally able to without breaking confidentiality rules. You get recognized by the media and professional organizations for your knowledge, by being a trusted source or speaker.
Again, the key is to showcase your firm’s experience. Building a brand name in your market as someone that knows their stuff and can provide results is such a key differentiator when you have lots of new competition.
Want Help Preparing Your Law Firm for a Recession?
Springboard Legal can help! Our trusted experts have been through recessions before and can help you.
Kimberly DeCarrera handled large tax payments on the day we didn’t know if Wells Fargo was even going to survive back in 2008. Her own law firm’s credit was slashed during those rough days. But she helped a law firm grow and expand coming out of that recession as well.
Kimberly and her team can help your law firm too. Good news is that we do have options. From Fractional CFO to Fractional Operations support that are month-to-month with no long-term contracts if it isn’t working, we can help you build and run your law firm that is designed not only to survive but to thrive during a recession. So you don’t run out of cash or burn out.
Let’s chat soon about growing your law firm, even during a recession.