Retained Earnings Prepare Law Firms For Unexpected

Our political climate is warming to the idea of cutting back on sources of energy that produce carbon emissions. At the same time, energy prices are increasing. This may very well cause a crisis within the next 10 years as our population grows and our ability to provide cheap sources of energy decreases. An estimate by Cambridge Energy Resource Associates claims that $900 billion needs to be invested in our energy infrastructure within the next 15 years. Much of this is upgrading existing power sources - but there is also expansion needed to keep up with demand. Worse, the still unknown cost of expected reductions in carbon dioxide emissions that the world is working hard to mandate isn't factored in this estimate.

We don't have many politically friendly energy sources. Coal, the country's most plentiful and most used resource, is disfavored as a means for energy. Oil is hated for several reasons (though we are increasing our investment in the fossil fuel, as noted later), and there is a better chance to build on the habitat of an obscure endangered species than get a permit to build a nuclear power plant. The remaining "green" choices are either not sustainable for large populations or (at least currently) too expensive to replace exisiting infrastructure without causing serious effects on the economy.

Based on the above, it is possible that energy costs will increase massively in the near future. Then again, we may be stricken by a disease that reduces our population significantly, rendering the energy problem moot. Unforeseen events, the "black swans" that shape our economic and social life, must be considered when making long-term plans.

Is your firm prepared to absorb the costs of an expected or unexpected hit on the economy? Is your firm positioned to take advantage of such a happening?

There is only so much for which we can plan. However, the occurence of the unforeseen cannot be ignored and those who can anticipate and plan for unexpected events are at an advantage - and may save the firm from financial ruin. Think it can't happen to you? Talk to firms from New Orleans who ignored calls for disaster recovery planning before Hurricane Katrina literally destroyed their businesses overnight. Talk to business in New York after the twin towers fell where both life and livelihood were suddenly gone. It can and does happen. And will happen again.

What can be done? First, understand what your firm's strengths and weaknesses are. Do you have attorneys who practice commercial law? Those in Texas seeing an increase in oil and gas business due to increased drilling in the Gulf of Mexico typically would also see an increase in manufactured housing purchases. This means mom and pop brokers making deals and selling paper to finance companies that bring in lots of business, be it financial paper swapping, fraud, bankruptcy, warranty defense or arbitration. Yet the cost of housing has been so low, the recovery of the manufactured housing market hasn't materialized yet. As the lenders get stingy in providing mortgages to those with imperfect credit, costs of ownership will rise to the point where it is likely that the manufactured housing market springs back, with all the related business to catch. Are you positioned to take advantage of this? What are the firms with a large staff of attorneys who focused on real estate going to do now that that business is in a trough? Make sure your firm is diverse enough to absorb market cycles.

Track the important profit drivers - not monthly, but daily. If you don't have time for it, pay someone else to manage it. Have them report to you on a weekly basis to make sure the numbers are within acceptable ranges for your financial objectives. Have them prepare charts and detailed reports before meetings that can be explained to the other partners. Better yet, have these numbers in front of you on a dashboard so you know the story before you get the reports.

Just as you budget for increasing per partner income, budget for business need. To prepare for the unexpected, set aside a percentage of revenue towards a "black swan" reserve (yes, I mean retained earnings!). The percentage is dependent on your assessment of need. Cash flow latency should be a part of the equation. One way to lessen the impact to income is to install tools that will streamline workflow and increase cash flow which can lead to higher margins. Other things would be to review markdowns, effective rate, and collection realization to see where you can improve. This will bring in dollars without having to work harder or use new clients/ matters to fund the reserve.

In the summer of 2000, no one knew with certainty that the end of the tech market boom was about to end. Some could predict it - the Federal Reserve had been increasing interest rates consistently to slow growth - but no one could accurately foresee the fallout and the disaster to the tech market after the inevitable market crash. Those companies that saved their money and didn't distribute all the revenue to shareholders (and were closer to showing a profit) were the ones who survived to buy up the good ideas left behind.

Are you prepared for the unexpected?

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