In 2014, the Harvard Law School published a study that recognised accounting and finance acumen as the most valuable skill for legal employers [1]. After a few months at PwC I started to realize the relevance of financial knowledge for prospective lawyers and in this blog post I would like to give some examples of what I have learned.
Finance and business acumen could help aspiring lawyers get a better grasp of how businesses function in general. Having even a basic understanding of these concepts can aid you while progressing through the stages of your career. Thinking like an entrepreneur (i.e. your future client) will enable you to incorporate commercial awareness into your legal advice. The best way to obtain finance and business awareness is to expose yourself to practical work experience in order to observe how a business is carried out in real life.
Understanding your firm in connection to finance
Firstly, it is essential to understand that the legal world does not operate in a vacuum. As every business, any law firm operates within financial markets thus has to keep track of its finances. Compliance with financial recording guidelines is one of the first things that indicates the trustworthiness of a business. A firm’s reputation is one of the most crucial elements that can determine its competitive advantage, thus dictating how much profit the firm generates in the future.
If you would like to open your own private practice one day, you are expected to manage your accounts yourself or delegate it to an accounting firm. To start a private practice, you are expected to gain investors, make budget decisions, monitor your competitors and bring clients in. If you decide to join one of the big law firms, as a junior you are not expected to do this. However, in the early stages of your career you will most likely be asked to accurately record your hours and any travel expenses you might accrue during business trips. This is usually done by the firm’s specific time-recording programme that sends your hours spent on the case to the accounting department, which then bills it directly to your client.
Understanding your client in connection to finance
In practice, the majority of law firms’ clients are businesses (unless you decide to work for example in family law or for a charity in a legal capacity). During the time you work on a project you practically become a part of the client’s employee team thus turn into a significant expense for your client’s business.
Lawyers are commonly called in to deliver fast and commercially advantageous solutions connected to the legal claim a client is facing. Any ongoing litigation is a threat to your client’s business. This is due to the fact that litigation is demanding of money and other resources. While there is an ongoing litigation matter threatening the business, much of the firm’s capital is tied up in legal fees so the money cannot be used elsewhere for business development. This can seriously affect the financial health of your client’s business as, while the competition is progressing and innovating, a business under litigation lacks the resources to do that. Depending on the seriousness and length of the litigation, it may even cause your client to go into a liquidation.
Businesspeople are usually interested in hearing easy and fast solutions that can be implemented immediately and will bring money to the business. Successful lawyers are able to implement the most commercially advantageous solution based on the finances that the client has available. This might mean advising the client to settle outside of court.
Being aware of the health of your client’s finances not only shapes the type of advice you provide but also your decision to enter business relationships. If you are a legal practitioner, the finances of your client influence the fee you will receive for representing them, which then dictates the resources you can allocate to this particular project. If you undervalue your work, it might negatively reflect on the profit and reputation of your own practice.
These were a few examples of why it is important to understand the basic concepts of finance in the context of legal business.
[1] ‘HLS Study: Major Law Firms Recommend Finance Classes | News | The Harvard Crimson’ (Thecrimson.com, 2020) <https://www.thecrimson.com/article/2014/2/24/law-school-study-finance/?page=single> accessed 7 March 2020.
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