Budgeting for solo and small law firms is an important management task. It’s easy for solos and small firms to be less-than-formal when starting a new firm, or moving forward once already established, to put a budget on the back burner when the focus is on trying to build up a client base, tending to their needs and squeezing in time to handle a myriad of day-to-day operations.
It’s also easy to ignore the importance of creating a reasonable and realistic budget by which productivity, profitability and growth can be measured. A solid budget is part of the foundation of a well run law firm of any size.
Set up properly and with intent, a budget should reflect your values, your mission statement, and (hopefully, you have one) strategic plan. If you don’t already have a strategic plan, a budget can be very instrumental in helping to create one.
A budget should focus on three things:
Expenses: Track your expenses (fixed, such as rent or salaries; variables, such as delivery or telephone; one-time, such as new software), assigning them each to more general categories that make sense. It’s critical to review your expenses monthly, or quarterly at the very least. Your actual expenses versus your budgeted expenses will tell you where you are overspending, or perhaps where you need to focus.
Start by creating a basic budget which shows what you would need to keep your head above water. Then create a “wish list” budget, one that includes all the items you would like to purchase or invest in to grow your business (a part-time admin assistant? a faster copier that prints in color?).
Ultimately, you will land somewhere in the middle after you have projected your revenue.
Revenue: While it’s important to look at both billable and non-billable hours, your billable hours are the focus for calculating revenue. Make sure your billable hours allow you to spend enough time with your clients to provide the excellent service they deserve (and that you have the resources to do so). Your billable hours should forecast a realistic and reasonable amount of growth to your client base.
Once hours are calculated, assign a fee value. If possible, use a “realized” fee value based on past billable versus collectible. You may bill out at $400, but realistically only collect $390 after write-offs and adjustments. If you haven’t tracked this in the past, start now as it will be helpful for future budgets.
A note about non-billable hours: They will be greater than you anticipate. Be sure to plan for non-billable hours for administrative tasks, marketing and networking. They have a value that is measurable, but that is a topic for another day, another newsletter.
Profit: Projected revenue minus your projected expenses will give you an estimated profit figure. Is this an acceptable amount that allows you to compensate yourself as well? If so, have a second look at your “wish list” budget. Can you include that part-time assistant or new copier and still make a living wage? No? Then set your goal to include these in next year’s budget. If tweaking expenses does not allow for growth of your business and a salary/draw, then you will have to seriously look at increasing revenue by working to bring in more clients and bill more revenue generating hours.
Your projections for expenses and revenue should be reasonable and realistic (even if it hurts!) in order to be an effective guideline for operating your business. Do not overstate revenue projections when you know they are far-fetched. And, if there is a second set of eyes that can review your figures, use them; they may catch something you have missed.
A monthly review of your Profit & Loss Statement will tell you if you are on track. If the year is not going as you had hoped, realize there is no sin in re-evaluating your priorities and strategies. Perhaps a one-time expense can be put off until next year. Regardless, your review is an opportunity to spot potential problems and get ahead of them to either stop them or mitigate further damage.
If you haven’t created a budget before, you might wonder where you begin. You can:
- Gather information online. It is easy enough to find templates to use start the process. A simple Google of “budget template for law firms” turns up one at www.lawsociety.bc.ca.
- Speak with others in your field. While they may not be willing to share dollar figures, they might share percentages (what percent of total expenses should be budgeted for employee costs or IT needs?).
- Attend educational sessions that focus on the budgeting process. Look to your bar association or other legal industry association.
- Hire a professional to set your budget up for you.
Not everyone lives in Excelland like I do, but I find it very comforting to see my projections on a spreadsheet in black and white. It provides an objective and clear picture of what the future holds and helps to maintain the accountability for what comes in and what goes out.