No matter what size your law firm is, a budget is essential to keeping your business running. It’s the key to prioritizing the most important aspects of your firm. Yet even the most experienced lawyer can feel overwhelmed when building their budget.
Where do you start?
What should you include?
How much percentage should be allocated?
There’s a lot of pieces to figure out! But analyzing and structuring your budget is critical for growth and business planning. Your main priorities when creating a budget should be to consider your income and expenses, automate your costs and fees, and keep track of your finances as predictably as possible.
Consider your expenses and revenue
Get ahead of your expenses
When hashing out a budget for your firm, consider the expenses you can expect throughout the year. Think Bar Association dues, continuing education, taxes, salaries, and malpractice coverage. Grouping these and other non-negotiable outflows can create a foundation to build your budget upon. If you’re launching your own firm, consider your startup expenses as well.
The rest of your budget will vary based on your firm’s specific needs. Taking a mental journey through your business’ needs from bottom to top – from minor, ‘throwaway’ expenses (think paperclips) to big-ticket items (like office space) – can help you visualize the big picture of how these expenses can build.
A good rule of thumb? Whatever amount you plan to allocate to each expense category, add a 5-10% emergency cushion (you can always reallocate). You can sort most operating expenses into the following categories:
- Hardware and technology
- Software and services
- Office space, supplies, and utilities
- Marketing materials and advertising
- Travel and networking events
While you can find suggestions for budget allocation across many resources, budget building is not one-size-fits-all; many expenses found invaluable to some may not be as crucial to others. For example, it’s recommended to allot 7-8% of your gross profit margin to marketing and advertising. Office furniture and supplies can take up about 10% of your budget. These percentages can vary based on your profit margin, business goals, and firm setup (virtual versus in-office).
Project your revenue
Once you’ve reviewed and combed through your typical and anticipatory expenses, it can be helpful to audit your revenue over the previous year (if applicable) and run projections for the coming year. Consider your gross profit margin in relation to your expenses.
A goal to strive for? Aim for a net profit margin between 35-45%. From there, you can break down your expenses and see where to divide your income.
If your revenue will not cover your expenses, you’ll want to look for areas where you can trim to help meet your desired net profit margin. Setting a budget provides you with the opportunity to really evaluate where your firm’s dollars are going—and don’t forget to include paying yourself as part of those expenses!
Automate your cash flow
Out of sight, out of mind (in a good way). Now that you’ve budgeted your expenses take measures to automate your income and outflow. For example, flat fee rates can create a consistent, predictable revenue stream. Law-firm specific and accounting software can also help you streamline your invoices and income.
Automate your outflow, too. What times of year will be busiest for you? When will you be in the biggest time crunch? By projecting your recurring expenses, you can set up repeat payments for items that don’t usually need you to review or reassess. This will tick even more boxes on your to-do list before you even need to think about it.
Keep track and make adjustments as you go
No two years are the same, so budgets are a rolling stone. The best way to keep them moss-free? Keep track of your finances and make adjustments as you go.
While you should be allocating a part of your budget to unexpected expenses, staying on top of your predicted versus actual expenses can empower you to restructure your budget when needed.
With the remote capabilities now available to most companies (thanks, 2020), is the largest-bandwidth, highest-speed internet in your headquarters still necessary for your employees? With the rise in online contracts through programs like DocuSign and paperless matter management programs, do you need to reassess office supply expenses? Are you spending way too many of your business hours answering the phone and need more secretarial support?
Keeping track of your budget and analyzing which expenses generate the most income can allow you the freedom to adjust your budget and grow your revenue stream.
Efficiency is key
We’ve said it before, and we’ll say it again: automation is your friend. By using the right tools, it’s never been easier to keep track of your expenses and shift funds around when necessary. Annual (or even quarterly) budget reviews can allow you to reset and reassess what you’re spending, what you’re earning, and how to balance the two.
Firm your firm’s budget
Taking the plunge and starting your own firm, or taking your firm’s finances to another level, can be intimidating. By reflecting on these steps, you can easily create a solid budget to build a successful practice.