Lawyers aren’t typically trained to build law firm budgets — but if you want to operate your own practice you need to learn. Move past the overwhelm with the three tips (and 4 starting steps!) below.
If you’re just starting your law practice in Massachusetts, don’t miss one of Mass LOMAP’s Free & Confidential Law Practice Startup Workshops, offered throughout each year in Boston, Springfield, and online. Our next is in Boston on January 17. Find more details, dates, and locations — and sign up here.
We thank Stephanie Everett at Lawyerist.com for this helpful guest post.
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Just seeing the word “budget” can fill a lawyer with dread. You didn’t get to law school to deal with numbers. But you do need to understand numbers — and especially your budget — to run a successful firm.
TIP ONE: START WITH 4 BASIC STEPS.
When you’re first figuring out your budget, you just need to get it out of your head. Don’t procrastinate by researching the best budgeting software. Pull up a spreadsheet, and plug in the following numbers. If you don’t know these numbers yet, research industry standards. You’ll want to search in your physical location and practice area for average salaries and attorney costs.
Step 1: Project Your Revenue.
If you’re just launching your firm, start with your goals. Where do you hope to be in a year? A quarter? A month? Now, reverse engineer those numbers to see how many clients you’d need to reach that goal. Is that realistic? Great! Start there.
If you’ve had a practice for a while, look at your historical numbers. What’s a reasonable growth rate given your past performance? Or are there contributing factors such as a new attorney or new product offering that justify significant growth in the coming year? Take those into account.
Step 2: Project Your Expenses.
Your expenses are mostly known and easier to predict. Here are the different categories to keep it straight:
- Monthly, recurring expenses: things like rent, utilities, or software subscriptions
- One-time or irregular expenses: malpractice insurance, website design, or business cards
- Your staff’s salaries and benefits – or costs for your virtual/outsourced team
- Your salary. Important: Don’t skimp on this. Paying yourself is crucial — a healthy business should pay you a market rate for the work you do
Step 3: Determine Your Cash Reserve.
You’ll need cash to finance your business. Some months may be slow for collections. Or unexpected expenses may hit. You don’t want to be caught unprepared. Ideally, you want to set aside 2-3 months of operating expenses to weather those storms. If you don’t have access to a line of credit, make a plan in your budget to save money each month towards your cash reserve until you have it fully funded.
Step 4: Create a Savings Plan for Larger Expenses.
Sometimes, you’ll need to invest in your firm for future growth. Maybe you’ll invest in new technology, hire a new team member, or move your office. Whatever it is, be ready by creating a savings fund from current revenue that can finance these larger investments.
Put a couple of hours on your calendar right now to take the steps above.
TIP TWO: FIND YOUR AUTOMATED TOOL.
The real benefit of a budget is knowledge. Don’t think of your budget as a limitation. Instead, it’s a quick and easy way to check your firm’s financial health. The fastest way to see if you’re making sufficient revenue and keeping your spending in check is to look at your actual expenses each month and compare them to your budgeted expenses. If something looks out of line, you can quickly identify it, investigate, and make changes.
The good news is that most accounting software tools will include a budgeting tool. Adding your monthly budget into this tool allows you to compare numbers quickly. Take a minute now to see if your tool includes a budgeting tool. If yes, go ahead and schedule 30 minutes to add all of your expenses into the program.
TIP THREE: KNOW WHEN TO HIRE HELP.
Once you know your numbers, you’ve got your tool, and feel prepared to explain your budget, goals, and needs, consider bringing in help. We hear all the time from lawyers that they can do it themselves. Then, months down the line, no matter how organized they are, they’re drowning in busy work and don’t know where their finances stand.
Get help early and you’ll avoid these common pitfalls. As you sift through possible bookkeepers (many of whom may be virtual), here are the questions to ask yourself to drill down on your needs:
- Do you need full-time or part-time help? (Most attorneys start with part-time help.)
- How tech-savvy do they need to be? Will they understand the tool you chose?
- What tasks will you need done? Make a very specific list.
- Do you need them to be just familiar with lawyers, or familiar with your practice area specifically?
- Do they have the ability to grow with your firm when you graduate beyond the basics?
Bottom line: Don’t let the budgeting process intimidate or scare you. Too many people won’t dig into their numbers because they’re afraid of what they’ll uncover.
Take control and decide that you’ll use your numbers for good. Create your budget and review how you’re doing against that budget each month so you can make informed decisions based on the data. In the end, you’ll feel great about your decisions and confident about your business.
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Stephanie Everett is the co-author of Lawyerist’s new book The Small Firm Roadmap. She facilitates Lawyerist’s Insider, Lab, and LabCon programs, where she teaches and supports solo and small firms how to design and implement effective business strategies. You can find Stephanie at Lawyerist.com.