By Darren Wurz
If you’ve been listening to the headlines lately, you know that a recession is likely on the way. No one knows exactly when it will happen or how bad it will be, but one thing is certain: It’s better to be prepared than to be caught off guard. Even highly specialized fields, like law, are not immune to the effects of a recessionary environment, but there are proactive steps you can take to mitigate your risk. Here’s what law firm owners and attorneys can do to prepare for economic volatility and survive a recession.
What Is a Recession?
A recession is defined as two consecutive quarters of negative GDP growth and generally lasts about 10 months. Despite the fear and uncertainty that surround recessions, they are actually a normal—and expected—part of the economic cycle.
Economic expansions cannot last forever. A recession is simply the economic contraction that occurs when the factors that promote growth (low interest rates and high demand) are no longer sustainable. As scary as they are, recessions are sometimes necessary to correct market imbalances and bring accurate and reasonable prices back to the market.
That being said, recessions are notoriously difficult to predict, which means being prepared to weather the storm isn’t always easy. At Wurz Financial Services, our goal is to help solo and small firm attorneys strengthen their practices and keep themselves in a financially healthy state, so that surviving a recession becomes that much easier.
Recession-Proofing Your Law Firm
There are several steps you can take to recession-proof your law firm, and all of them should be done well in advance of the first signs of economic turmoil.
- Strengthen your cash flow: This is one of the best ways to insulate your firm from the effects of a recession. The more you can predict and maintain your cash flow, the easier it will be to navigate an economic downturn. Make sure you are using software to track your income and expenses and projecting your cash flow several months in advance.
- Maintain liquidity: You should maintain a sufficient liquidity cushion that can help you weather any interruption to business. It’s also a good idea to establish an emergency line of credit well in advance of a recession. This shouldn’t be your sole source of liquidity, but it is a good backup in the event of true emergencies. Don’t wait until a recession has happened to apply for a line of credit; it is much harder to qualify when the economy is already in a downturn.
- Charge what you are worth and collect your receivables: It may seem counterintuitive to continue charging high prices for your services in the midst of a recession, but it’s important not to compromise on your worth. If you cut your prices, it will be much more difficult to raise them in the future, and you will reduce your cash flow right when you need it most.
- Become more efficient: Improving your firm’s efficiency is always something to strive for, but it will definitely help out during an economic downturn. When times are good, invest in technology that can make you more productive and reduce waste. Cut unprofitable services and clients, and make sure highly paid attorneys are not spending time on low-value tasks.
- Improve the value of your brand: Surviving a recession is less about getting new clients and more about improving your current client loyalty by strengthening your brand and beefing up client relationships. After all, it costs much less to keep an existing client happy than it does to gain a new one.
- Diversify your practice: Consider adding a practice area that can do well during times when your main practice area may be suffering. In this way, you can diversify your practice like you would diversify your investments. Be careful that whatever practice area you add is also profitable and will not dilute the branding of your firm.
If a recession does occur, it will be important to modify your cash flow accordingly. Put off upgrades, repairs, or other expenses that can wait, and revert to monthly payment plans instead of pay-ahead plans for those that cannot. Also work to attract the competition’s clients and be willing to adapt to changing circumstances. Firms that market aggressively even during downturns are much more likely to survive a recession.
Recession-Proofing Yourself
It’s not enough for an attorney to recession-proof their practice, it’s also important to recession-proof your personal finances as well. Here are some tips to consider to improve your ability to survive a recession:
- Emergency fund: Similar to maintaining a liquidity cushion in your practice, you should maintain a solid emergency fund for personal expenses as well. Be sure you’re putting idle cash to work by maximizing the interest rate you receive on your funds.
- Diversify your personal income: Having multiple sources of income can be a big help when your business experiences a rough patch. You can diversify your personal income by investing in dividend-paying stocks, bonds, real estate investment trusts (REITs), and master limited partnerships (MLPs). For instance, if you build up a portfolio of $100,000 in high-yield bonds paying 12% interest, you will have an additional income stream of $1,000. You can then reinvest the proceeds until you need them.
- Real estate: Investing in real estate, either through flipping or rentals, is another way to diversify your income stream. Keep in mind that this option does involve additional work and expenses, so it will not be pure profit.
- Side hustle: Do you have a hobby that you really enjoy that could potentially generate revenue? If so, this could be a way to strengthen your personal finances during a recession. It’s most likely a last resort for most attorneys, but it is something to consider if your business has taken a major hit.
Are You Prepared for a Recession?
Recessions are notoriously difficult to predict, but with careful planning there are steps you can take to prepare. Now’s the time to strengthen your business and your personal finances so that you have a better chance of surviving a recession. Schedule a no-obligation consultation, and together let’s find out if we’re the right people for you to depend upon during your journey to a recession-proof financial plan. Contact us at 859-291-9879 or dpw@wurzfinancialservices.com today!
Also, join us at one or all of our free webinars:
- Social Security 101: The 3 Rules to Maximize Your Lifetime Retirement Benefits!
- Will I Have Enough to Retire?
- Retirement Planning Strategies for Solo & Small Firm Attorneys
About Darren
Darren Wurz is a fee-based financial advisor and co-owner of Wurz Financial Services, where he operates the Northern Kentucky/Cincinnati office. He is a CERTIFIED FINANCIAL PLANNER™ and has a master’s degree in financial planning from Golden Gate University. Darren specializes in serving the unique financial planning needs of attorneys and law firm owners. He is the host of The Lawyer Millionaire Podcast and author of The Lawyer Millionaire: The Complete Guide for Attorneys on Maximizing Wealth, Minimizing Taxes, and Retiring with Confidence, published by the American Bar Association.
Darren is a member of the American Bar Association and the Financial Planning Association. He is also active in his local community as a member of the Northern Kentucky Bar Association, Cincinnati Bar Association, Covington Business Council, and Northern Kentucky Chamber of Commerce. To learn more about Darren, connect with him on LinkedIn.