2020 turned out to be a tough year. Many businesses had to improvise on the go as plans and budgets failed to work in the crisis environment. The real value of risk management has never been more evident. Unfortunately, the Covid-19 crisis is still forcing us to live in uncertainty, which puts extra pressure on financial and legal departments as they prepare 2021 annual budgets.
The speed and complexity of today’s economic environment pose an extra challenge to annual budgeting. As a result, traditional planning processes are no longer a good fit for most organizational needs.
To keep on top of things and deal with the unexpected, companies should first step away from the traditional budgeting schemes and develop new ones. Second, all organizations should focus on stress testing their business to check if they’re able to handle an economic crisis. Third, companies should leverage budget flexibility more than ever. A flexible budget will help you track your spending and adjust it on a monthly basis.
Companies must learn to expect the unexpected—and incorporate risk management into their daily operations.
Most importantly, companies must learn to expect the unexpected—and incorporate risk management into their daily operations.
The benefits of a legal budget
Planning allows your company to anticipate potential areas of need. This is particularly important in high risk businesses which are likely to confront problems.
On top of that, planning a legal budget:
- Makes the legal team more credible across the board and the company
- Improves forecasting
- Facilitates crisis management by outlining potential risk scenarios.
As a result, your company can make smarter decisions faster.
What goes into a legal department budget?
The very first thing you need to do when preparing an annual legal department budget is to put together a list of all items that make up a budget. Here are the key components:
- External talent
- Tech stack
- Membership and subscription fees
- Office supplies
- Risk budget
It is important to consider all of these elements to get a clear picture of where you stand at any given moment.
Best practices for planning a legal department budget
When thinking about budgeting, you should consider all kinds of implications stemming from different strategic objectives. The potential value of budgeting extends well beyond cost savings. Below you’ll find best practices for planning your 2021 legal department budget.
1. Leverage the use of legal tech and contract management software for in-house counsel
Technology is changing the way we live and work, and the legal industry is no exception. Organization, legal process optimization, and document automation are three huge benefits offered by legal contract management software. Using a CMS, companies no longer need to rely on the physical copies of contracts that can easily get lost or misplaced.
2. Set success metrics
When it comes to tracking your business day-to-day, there are certain financial KPIs you should consider. These include cash flow and revenue. Having measurable KPIs will form your long-term strategy (either driving more revenue or cutting expenses) and determine the success of the legal effort.
3. Consider zero-based budgeting
This type of budgeting assumes that a budget for each new period is created from a “zero base.” This means that you have to justify each expense—even old or recurring one—before adding it to the new budget. The major benefits here are flexible budgets, focused operations, lower costs and more disciplined execution.
4. Make sure your budget is in line with the company’s goals
A mismatch between the budget and business strategy might lead to inefficient budgeting and poor strategy implementation. It is only when the budget is brought in line with the business strategy that you can effectively allocate spending and investments.
5. Analyze 2020 annual budget
Look at the historic spend: how much did your department spend before? How has it changed in 2020? Scale from 2020 data and crisis-imposed risks, as it is more likely to reflect the 2021 environment.
6. Use stress testing to mitigate risk
Stress testing is a traditional tool used by the financial industry: in the United States, banks with $50 billion and more in assets are required to undergo internal stress tests. It will be useful for your company as well: measure investment risk and the adequacy of assets, as well as evaluate internal processes and controls.
7. Account for remote work scenario
Covid-19 related lockdown isn’t over yet, and it may become more common to work remotely. In fact, some companies extended their #WFH policies by a year. You should calculate this into your budget, whether it is adding or cutting costs.
8. Be prepared to cut costs
Chances are your board is going to ask you to cut the budget down. So, it’s best to make provisions for potential budget slashes so that any essentials such as salaries are not affected. #WFH policies adopted by your company will help you cut the office and supplies expenses, and event and travel budget items will be significantly reduced as well.
Putting it all together
Preparing a 2021 legal budget and forecasting may seem daunting to a law department, but the truth is that the benefits here far outweigh the effort. A well-planned legal budget will prevent legal problems and boost revenue—a win-win in times of uncertainty. And should you need help with legal process optimization, don’t hesitate to contact AXDRAFT immediately.