As law firms begin thinking about 2027, it can be tempting to start with a growth target. Take this year’s revenue, add 5% or 10%, adjust a few expenses, and use that as the foundation for next year’s budget. The approach is simple, but it can overlook some of the most useful information your firm already has.

A stronger law firm financial plan starts by looking backward before looking forward. Which parts of 2026 performance were sustainable? Which results were unusual? Where did collections slow down? Which expenses increased faster than expected? Most importantly, did revenue growth actually translate into stronger profitability, or did the firm simply become busier?

Understanding those patterns can make the difference between a 2027 plan built on assumptions and one built on how the firm actually operates.

Start With the Story Behind Revenue

Revenue is usually the first number firms look at when evaluating performance, but the total alone does not explain what happened. If revenue increased 12% in 2026, for example, that may look like a strong year, but the more useful question is what actually caused the increase.

Growth may have come from:

  • More matters
  • Higher billing rates
  • Better attorney utilization
  • A new practice area
  • One or two unusually large clients
  • Improved billing and collections
  • Additional attorneys or staff

Those causes matter because not all revenue growth is equally repeatable. If much of the increase came from one unusually large matter, carrying the same growth assumption into 2027 could create an unrealistic budget. If growth came from higher rates across a stable client base, it may be more predictable.

Similarly, if revenue increased because the firm added another attorney, the planning discussion should also include the additional payroll, benefits, technology, support, and overhead required to generate that growth. Before setting a 2027 revenue target, managing partners should understand where 2026 revenue actually came from and which parts are likely to continue.

Look at Collections, Not Just What Was Billed

A firm can generate strong revenue while still experiencing cash-flow pressure if collections do not keep pace. That is why 2027 planning should include a review of what happened between billing and cash collection during 2026, not just how much revenue appeared on the income statement.

Managing partners should consider questions such as:

  • Did collections keep pace with billing?
  • Did accounts receivable increase during the year?
  • Are invoices taking longer to collect?
  • Did certain clients or matters consistently create collection delays?
  • Were there predictable periods when cash became tighter?

If A/R grew significantly or more invoices moved into older aging categories, simply increasing next year’s revenue target may not solve the underlying issue. The firm may need to improve billing speed, collection follow-up, payment practices, or cash forecasting before assuming that higher revenue will automatically produce stronger cash flow.

For example, if the firm historically collects only part of its billed revenue within the same month, the 2027 cash-flow forecast should reflect that timing. Planning as though every dollar billed immediately becomes available cash can make a budget look much healthier than the firm’s actual operating experience.

Understand Which Expenses Really Changed

Many law firm expenses increase gradually enough that they are easy to overlook. Payroll may rise because of new hires or compensation increases, technology subscriptions accumulate, insurance premiums change, and marketing, rent, professional services, and administrative support can quietly raise the firm’s break-even point.

Before rolling 2026 expenses into the 2027 budget, it helps to separate them into a few categories:

  • Recurring costs: Expenses the firm reasonably expects to continue
  • One-time costs: Items that should not automatically carry into 2027
  • Growth-related costs: Spending added specifically to support expansion
  • Costs requiring review: Expenses that may no longer be producing enough value

This prevents a common budgeting problem: assuming every expense from the current year belongs in next year’s plan simply because it already exists. It can also highlight whether operating costs are growing faster than revenue and whether certain expenses deserve a closer look before the new year begins.

Did Higher Revenue Actually Produce Higher Profit?

Revenue growth is important, but it is not the same as financial improvement. A firm whose revenue increased 10% while expenses increased 15% may be larger, but it may not be financially stronger.

That is why law firm profitability should be part of the planning discussion. Managing partners should understand whether additional revenue translated into additional profit and, if not, what absorbed the difference.

Depending on the firm’s reporting capabilities, it may also be useful to look deeper than overall firm profitability. Certain clients, practice areas, fee arrangements, or matter types may have performed differently from others, and those differences can influence the assumptions that go into next year’s plan.

For example, a practice area may have generated strong revenue but required additional staffing, significant write-downs, or more attorney time than expected. Another area may have produced less revenue but stronger margins. The goal should not simply be to plan for more revenue in 2027; it should be to plan for profitable revenue.

Review Capacity Before Planning Growth

Financial planning should also consider whether the firm has the capacity to support its growth goals. If attorneys were already stretched thin in 2026, planning significant additional revenue for 2027 without adding capacity may not be realistic.

On the other hand, adding another attorney or staff member creates cost before that new capacity necessarily generates enough revenue to support itself. That means staffing decisions should be connected to expected workload, billing potential, collections, and the time required for a new hire to become financially productive.

Look back at how the firm operated during the year. Were attorneys consistently overloaded? Was administrative work slowing down billing? Were invoices delayed because partners did not have time to review them? Did the firm add staff without seeing the expected improvement in productivity?

Capacity is not just an operational issue. It directly affects revenue, payroll, profitability, cash flow, and the realism of the growth assumptions built into the budget.

Separate Repeatable Performance From One-Time Events

One of the most useful parts of reviewing 2026 is identifying what should—and should not—be carried forward into the next year. A major one-time client engagement, an unusually large settlement, a temporary reduction in staffing costs, or an unexpected expense can materially affect annual results without representing normal operating performance.

If those unusual events are included in the baseline without adjustment, 2027 expectations can become distorted. A useful planning exercise is to ask what the firm’s underlying financial performance would have looked like without those one-time events.

That adjusted view often provides a much better starting point for revenue, expense, profitability, and cash-flow assumptions.

A Practical 2026 Review Before Building the 2027 Budget

Before finalizing next year’s financial plan, managing partners should be able to answer a handful of questions about the current year:

  • Where did revenue growth actually come from?
  • How quickly did billed work turn into cash?
  • What happened to accounts receivable during the year?
  • Which expenses increased materially, and why?
  • Did profitability improve along with revenue?
  • Were staffing levels appropriate for the amount of work?
  • Which results were repeatable, and which were unusual?
  • Where did actual performance differ most from the original 2026 expectations?

The review does not need to become an elaborate financial exercise. Its purpose is to identify the assumptions that deserve to be carried forward, challenged, or changed so the 2027 plan reflects what the firm has actually experienced.

Build 2027 From Evidence, Not Just Ambition

There is nothing wrong with setting an ambitious growth goal, but the strongest plans connect that ambition to what the numbers say is realistic. If the firm wants revenue to grow 15%, management should understand what will produce that growth and what resources will be required to support it.

Will growth come from additional attorneys, higher rates, more matters, better utilization, improved collections, or a different mix of work? If expenses are expected to increase, which costs are driving the increase? If profitability is expected to improve, what specifically will create that improvement?

Those questions turn budgeting from an annual spreadsheet exercise into a management tool. A good 2027 plan should explain how the firm expects to perform, not just what the final numbers are supposed to be.

What Did 2026 Teach You About Your Firm?

Before deciding where the firm wants to go next year, it is worth understanding what this year revealed about how the business actually works. Revenue tells part of the story, but collections, expenses, profitability, capacity, and cash flow provide the context needed to build a realistic plan.

Looking at those areas together helps managing partners distinguish sustainable performance from temporary results and create a stronger foundation for 2027. The goal is not to predict the year perfectly, but to enter it with assumptions grounded in evidence and a financial plan that can be monitored as reality unfolds.

SkillBench specializes in accounting and financial reporting for law firms. If you would like greater clarity around your 2026 results before building your 2027 financial plan, we can help you review the numbers and understand what they are telling you about the business.

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