(by Connie Rudnick, Esq., Professor at Law, Massachusetts School of Law and Rob Armano)
This outline should not be confused with a business plan, something which all lawyers opening their own practices should have. A business plan includes specific marketing strategies and practice concentrations which are beyond the scope of this piece. The Small Business Administration has seminars on this topic, and assistance is available from the U.S. Small Business Association Small Business Development Center.
The first step is to identify all fixed costs and expenses. They include:
- Budgeting Lease/Mortgage Payments
- Equipment (telephone, fax, internet, computer, copier, printer, scanner) – Buy/Lease
- Advertising and Marketing
- Insurance (professional liability, workers’ compensation, renters’ insurance, health, disability and/or business interruption insurance, etc.)
- Budgeting for costs of Utilities
- Payroll and payroll related costs (payroll taxes, unemployment insurance, and self-employment taxes)
- Bank charges (for IOLTA, other client funds and business accounts)
- Software (word-processing, case management, time and billing, accounting, docketing and tickler system)
These expenses can be tracked by employing the use of financial budgeting software like QuickBooks, or by developing a budgeting spreadsheet within Microsoft Excel. If software costs are a concern, Staples carries general ledgers. If you’re really conservative, a legal pad will do. Make sure whatever form you use, you include and highlight due dates for installment payments. Check your local Bar Associations for other resources. The MBA, the ABA, and some local Bar Associations have sections devoted to small or solo practices or law office management. It’s a good idea to review all overhead and expenses with your CPA with an eye toward end of the year tax planning.
The next step is to look at budgeting discretionary costs. They include:
- Secretary and/or Receptionist (consider sharing or part-time)
- Law clerk or associates (many law schools have internship programs where students work in offices for credit, not pay)
- Library, secondary source materials, or computer research tools such as Westlaw or Lexis/Nexis (discounts are available to small or solo practices)
- Furniture (try used)
Gross receipts are your total income generated by your practice. Unless you already have a ready-made clientele, a client base can be built by advertising, word of mouth (friends & family), associations with other or community organizations, (Rotary, Chamber of Commerce, coaching little league, etc.), bar advocacy groups, CPCS, or by simply networking with other attorneys for case referrals in areas they do not generally practice in.
Tracking gross receipts can be accomplished by utilizing any of the methods referred to in paragraph (A) above. It’s a good idea to set aside a fixed percentage of your gross receipts, say 20% to 25%, into a “tax reserve savings account.” Quarterly taxes can be paid out of this account, rather than your general operating account, and you can avoid the shock/panic of paying taxes when due. Payroll withholdings can be treated in the same fashion.
“It’s not what you make, it’s what you keep.” It is vitally important to contain expenses in an effort to maximize net gain. Again, a CPA is vital in helping you keep more of what you earn. Many attorneys like to take a “draw” each week, since it makes no sense to operate a business if you can’t pay yourself. However, many law practices are cyclical, that is, you may have long stretches with short cash flows. It is more important to keep the business afloat than to take a draw. Some say that you cannot expect to take anything out of the practice for a year after opening it, and you should have a significant amount of one year’s overall expenses in savings before starting out on your own. A draw should be deposited into your personal or business checking account.
This is probably the most difficult part of starting a new law practice. Accurate projections are managed by constantly reviewing your case load with an eye toward which cases are proving to be fruitful, and which are not. If, for example, you have been retained to represent a plaintiff with substantial personal injury, you can not expect that her matter will bear fruit within the initial 6 months to a year of opening the file, or even longer perhaps.
In fact, prosecuting the matter may well involve advancing costs that can prove to be a drain on your resources. This should be factored into the equation. Prior years, while helpful, are not always good indicators of what you can be expected to earn this year. Many attorneys plan for the ebbs and flow of cash flow by obtaining a line of credit. Cash flow as well as expenses should be reviewed monthly to update, and bring projections into line with reality.
Fees are generally earned on an hourly or on a contingent basis. The types of cases that you handle, and the disciplinary rules will generally dictate whether your fees are earned hourly, or are contingent upon a result. Criminal and/or domestic relations matters cannot be handled on a contingency fee basis. Personal injury matters are generally handled on a contingency fee basis. In some instances, clients may be expected to advance costs associated with litigating a particular matter. In all cases, a fee agreement is vital. Consult with other lawyers in your geographic area with roughly the same experience in the same kind of law to determine a reasonable hourly rate.
Typically, attorneys in private practice can expect to work an average of at least 2600 to 3000 hours a year! However, only a fraction, maybe 50%, will be billable and the rest will go to administrative and marketing efforts. If your practice is devoted to Hourly work, there is an obvious correlation between the hours worked and the fees generated.
Solo by Choice: How to Be the Lawyer You Always Wanted to Be (by C. Elefant, 2008) (available through the Mass LOMAP Lending Library)
Flying Solo: A Survival Guide for the Solo and Small Firm Lawyer, 4th Edition (by K. William Gibson, American Bar Association) (available through the Mass LOMAP Lending Library)
The Profitable Law Office Handbook: Attorneys’ Guide to Successful Business Planning (by Edward Poll, Edward Poll & Associates, 1996)
MCLE and Bar Associations frequently have seminars on starting a law practice. Many practice oriented law schools also have courses on the subject that can be audited.