Finances for a Solo Attorney: Forecasting Income and Balance Sheets (Part 4 of 4)

Most solo attorneys are also first time business owners. Simple things, like setting up bank accounts, can become ginormous headaches. Depending on your practice area, lines of credit are essential to cash flow, which is another massive source of stress.

Then once you make money, there’s that whole paying taxes and stashing away excess for bad months. After a few months, take a look at your balance sheet and consider forecasting income to help maintain financial sanity.

Spend some quality time with your balance sheet

So you’re making money, according to your projections you will continue to do so, and you are paying yourself a modest amount. Why is that amount so modest? If you are doing your accounting correctly (highly advisable), your balance sheet should provide answers.

There’s a good chance you are running your own books as a way to reduce costs and using Quickbooks or some reasonable alternative. If you have a bookkeeper, then ask them to generate you a detailed balance sheet every couple of months. I have a feeling, however, that if you have a bookkeeper, they are already doing that.

Your balance sheet will show you income, expenses, and what your firm has actually made. I previously talked about making a monthly budget and you should know what it takes to run your firm—how much you spend on marketing, rent, phone service, etc.—every month.

Looking at your balance sheet will help you catch changes in those numbers and help you decide if it is worth it. I know lots of attorneys who are constantly surprised at how much they spend on ______. That’s not a good thing. If you are wasting money on an unnecessary expense, that money is coming out of your pocket.

Your balance sheet will also give you extremely helpful feedback on how your firm is making money. You might have thought that divorces were your bread and butter, but based on your balance sheet, criminal defense is really what keeps the doors open. Knowing this information can help you tweak your advertising, your intake, and maybe even your billing rates.

Don’t count your eggs before they hatch . . . well . . . sometimes it’s ok

It’s a dangerous proposition to rely on any income that is not actually in your control and possession. Whether you bill clients monthly or do contingency work, it can be easy to spend money you don’t have by looking at what “should be” coming in the door later. If you have taken anything from this series of posts, it should be to exercise financial responsibility—don’t spend money that you do not have.

However, there are times when I find myself working like crazy, not actually getting paid, and starting to freak out about cash flow. That is a major downside of contingency work—until the case settles and the settlement check rolls in, I do not make a dime. When this happens, I pull out my legal pad, list all my cases, and make a conservative projection of what the cases will settle for. I still might not see any money for months, but it provides assurance that there will be a payoff (or five) down the road from busting my butt.

Again, there’s no guarantee of getting anything until I actually receive the check and it clears. Psychologically speaking, however, doing a future projection can help put your mind at ease for at least a couple of days. When it happens again, do another projection.

If your business checking is full, it’s a good time to buy equipment

No, this is not contrary to last week’s post on paying taxes and managing income. If you withheld money for taxes, stashed away cash for a rainy day, and still have money left over, it’s a good time to upgrade your infrastructure. If you need a new desk, new client chairs, or a new computer, make those purchases right now.

Don’t wait until the chair breaks or your hard drive fizzles out, go ahead and upgrade now. There’s a decent chance your computer will just happen to go kaput during a really bad month. You cannot plan for the unexpected, but if you have been waiting for the right time to make business purchases, now is the time.

I’d still be careful about going overboard, but spend the money when you have it, not when you are praying for it to come in the door. It’s also a nice tangible and physical reminder that you made money (and will likely continue to do so). Another nice side effect, but if are buying something for your business, it should be deductible. Yes, you are still spending the money, but it should offset some of your income and therefore in theory lower your taxes. That doesn’t mean the purchases are free, but you get the idea.

The good news: it gets easier

Running your own business is not easy. Chances are, it will actually be much harder than you anticipated. Fortunately, the longer you do it, the easier it gets. Hang in there and reach out to other resources (tax attorneys, accountants, other attorneys) when needed. And never forget that your IOLTA account is only for client funds!

(photo: http://www.flickr.com/photos/68751915@N05/6793826885/)

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  • http://ethicsmaven.com/ Eric Cooperstein

    Randall, I don’t get how a balance sheet would show whether a lawyer was making more money on criminal law cases than family law cases. To do that, wouldn’t the lawyer have to code or divide up income and expenses into separate categories for each area of practice? Even then, the balance sheet wouldn’t tell you what your collection rate was or how many hours you were spending on cases. To do that, I think a lawyer has to keep track of all the billed and unbilled time on cases and then compare that to collections.That sounds like a job for practice management software or a good spreadsheet, not a balance sheet.

    • http://lawyerist.com/author/samglover/ Sam Glover

      (a) If you have different practice areas, you should definitely use different accounts for income from each. I get pretty granular with my income accounts. With my business practice, for example, I separate out clients on recurring plans from clients who hire me only occasionally.
      (b) You should also run a profit & loss report, not just a balance sheet.

    • http://consumerlawyer.mn/cgi-sys/suspendedpage.cgi Randall Ryder

      It’s very possible my accounting terminology is not spot-on. The short answer (as Sam notes) is yes. For my two practice areas, I have different income accounts setup in Quickbooks, so I can track the income for each area.

      I also track my time very meticulously in each case, so it’s easy for me to figure out what the actual billed rate was on each matter.

      That said, I still think, at a minimum, looking at your balance sheet (or P/L report), will at least tell you where the money is coming from. I think lots of lawyers would be surprised to find out where they are generating income. As you point out, however, it still requires a more detailed analysis to determine how profitable those cases are.

  • Brian

    Thanks, Randall. I found this series very helpful.

  • Paul Spitz

    A balance sheet will only give you a snapshot of your firm’s assets and liabilities as of a specific date. An income statement (or P&L) would tell you about your firm’s income. In all likelihood, your assets will consist of your technology ( computers, printers), which will depreciate quickly, your office furnishings, and your receivables. That’s what your clients owe you in fees. Manage that number like a hawk, along with your liabilities.