When we hear the word “Budget” we cringe at the thought of what comes next. Budgeting isn’t exactly the most glamorous task you get to perform as a law firm owner. You’d rather dig into the details of your next case or plan how you’re going to present a convincing argument during your client’s upcoming trial.
But, doesn’t creating a system of sound budgeting practices to ensure your firm is able to maintain its financial stability while also meeting its growth objectives sound fun! So instead of calling it budgeting, lets call it financial success!
Sound financial success (aka budgeting) practices and principles may seem as easy as making sure expenses never exceed revenues. The reality is that creating and implementing financial success requires several essential steps and considerations.
Start with Expense Planning
The first step to creating any budget is to figure out your firm’s current and potential future expenses. Think about all of the different things your firm needs to operate and bring in clients. Common budget items and categories include:
- Technology and computer-related devices or services, including internet.
- Leasing or ownership costs for office space, including utilities and upkeep.
- Bar association dues.
- Malpractice insurance premiums.
- Phone service, whether traditional landline, cellular, or VoIP.
- Software programs and applications.
- Hiring and retention related expenses, including salaries, benefits, and workers’ compensation insurance.
- Travel expenses for conferences and similar activities.
When putting together your list of expenses, consider whether you need to consult with others who work for you. If your firm is just starting out, you may not have other employees or internal departments to consider or consult with now. If you do, they may have expertise and insight into what your firm’s short and long-term needs will be when it comes to office supplies or technology needs. Take the time and ask them for their input.
Also, consider your firm’s growth plans and objectives. More clients often mean adding more staff and the possibility of moving to a different, larger office. Planning for growth means planning for larger expenses, what necessary resources those increased expenses will go towards, and what ROI your firm can expect.
Plan Your Income
A second sound budgeting practice is to forecast your income or revenues from clients. If your firm is new to the market, this could prove to be more difficult. However, you can ask or research your competitors to get a better idea. If you’ve been in practice for a year or more, you can use past income to help you make more accurate projections.
Regardless, there are several factors to keep in mind as you map out your income projections:
- Break it down by month, quarter, and year. Try not to plan more than two to three years ahead, as market conditions can change.
- Factor in the likelihood of repeat and one-time clients, as well as clients on retainer.
- Consider the area of law your practice is in and the amount of competition in the area.
- Factor in delayed, late and returned payments, as well as accounts that need to go to collection.
- Consider the percentage of growth you’ve planned and compare it to previous revenues or best guesstimates based on market averages.
Track Revenues and Expenses
Similar to your personal budget, your law firm’s budget can only serve as a tool to help your firm succeed if you track what’s going out and what’s coming in. Not only does tracking help you make more accurate predictions, but it can also alert you to when you need to cut back or you can afford to invest more. While a spreadsheet program like Microsoft Excel or Google Sheets can work, you may want to invest in a more intuitive or sophisticated application.
Review Your Budget Each Year
Take a look at what your firm is spending and bringing in at least once a year. As a new firm, you’ll probably want to review your income and expenses every three to six months to ensure you’re on target with your projections. If you find you’re spending more or spending more in certain categories, you may want to make some adjustments. Likewise, if you’re not bringing in the income you need or enough income during certain months, you may want to adjust your expectations and/or your marketing plan.
Design and Implement Procedures
As important as it is to evaluate and track both expenses and revenues, you also need to establish budgeting policies and procedures to be effective. Ask yourself how purchases and spending will be approved. Will there be certain limits that employees or in-house departments can authorize on their own? Will employees need to purchase certain supplies from a list of vendors and seek a number of bids before making a final selection?
Also, consider how much debt you can afford to take out and carry. Documenting procedures and communicating them to employees is an integral part of ensuring your law firm stays successful. Don’t forget to align your budgeting practices and procedures with your firm’s overall goals and to update your budgeting procedures as your goals and internal environment changes.