Paul W. Carlson, CPA (00:00):
Hi, this is Paul Carlson, CPA with Law Firm Velocity. The most difficult financial component with contingency based firms is forecasting revenue that the firm will take on contingency fee cases and it's difficult to understand when the firm will receive fees for each of those matters. So the process we use is to create a pipeline report, which is what we see on the screen, and we use this to feed forecasted revenue into our cash forecast. So let's walk through this. So this is a pipeline report, and here we have the matter, the day that we expect the matter to close, expected settlement, contingency fee, probability winning gives us expected cash back into the firm that month.
And we have totals by month. So here we're expecting 14,000 in May, and way out in December, we're expecting $90,000 in collections. So how do we get this information? So we go into the practice management system and we add those as fields to each of the matters. So we have the settlement date, settlement amount, contingency fee, and probability of winning. And so this is what feeds into the report that we maintain this data for all of the matters, and once a month when we do the financial close, we export it out to a report. We update or work with responsible attorneys to update dates that need attention.
See here, the one thing you might want to do differently is forecasting settlement dates make sense for larger contingency personal injury type matters. The firm has hundreds of smaller matters. Another approach might be that we include the case open date, and we just assume that all matters close 14 months after the case open date. And that way you don't have to maintain the exact dates on hundreds of individual matters. Let's go back over to the spreadsheet.
So from this, we can export all these fields into a spreadsheet. Through Excel magic, we can calculate the expected cash and get the subtotals by month. So here we have the revenue forecast that then the next step is to turn the revenue forecast plus forecasted bills into a cash forecast. And that's where we take the forecasted revenue numbers and add them to our forecasted income statement. We model out to the rest of the firm's expenses for each month. Balance sheet, we model expected increase in advanced client costs and expected distributions to owners. And from that, we're able to forecast cash for the rest of the year.
So this row shows forecasted cash at the end of each period. And so in this example, the firm is expecting heavy distributions in December, and the firm does not have enough cash to fund those distributions. So we know we're going to have to work on revenue or change expectations on distributions. For a quick recap, the most difficult piece for contingency based firms is to forecast revenue and cash. So what we do is we add some extra fields into the matters within the firm's practice management system. We push that data into Excel and format it into this pipeline report. And we use this pipeline report to forecast revenue for the firm. And then we use the rest of our financial modeling tool to forecast cash. And this allows us to manage cash within a contingency based firm. Thanks. Bye-bye.