Do you like to have money in the bank? Of course you do! As attorneys, we tend to see a positive bankroll and think we’re in good standing in our business. This isn’t a true indicator of the health of our firms, however. We need a solid budget in place to cover expenses, pay ourselves, and discover how well our firms are performing.
Now, hearing the word “budget.” you may be ready to tuck tail and run. After all, the idea of creating a budget may feel overwhelming, especially if you’ve already been in business for several years. But a budget isn’t just functional—it’s a vital part of your business strategy, whether you’re starting a new firm or trying to keep your mature firm afloat.
Maybe you have no financial strategy and you’re winging it. Maybe you didn’t learn how to budget and now you’re not sure where to start. Or, maybe you’re crippled by overwhelm from all the options out there.
We totally get it. That’s why we’re ready to share our hacks and tips for creating a budget that works best for your firm, so you can gain back control over your finances.
Start With the Basics of Budgeting
A law firm budget is a business strategy in the raw, a list of expenses organized by category and broken down into digestible chunks. These expenses will look different, depending on where you are in your business. Your budget should include what you expect to pay in each category, and how it relates to your revenue over time.
Why Budgeting Is Important for Your Law Firm
One of our Labsters, Johnathan, checked nothing by his bank account (which showed a positive number), then decided to buy a new computer for his office. After unpacking it and checking his email, he saw a bunch of bills he missed – bills that still needed to be paid. With a bit of budgeting ahead of time, Johnathan could’ve avoided the facepalm that came when he realized what he had done.
Budgeting allows you to:
- Invest in technology, people, marketing, and other improvements to continue building your firm
- Spot issues in your firm before they morph into emergencies
- View how your law firm is performing month to month and year to year
- Manage and minimize financial risk
Understanding Budgetary & Financial Key Terms
To better understand the important numbers in your budget, let’s break down the key terms associating with creating a law firm budget:
- Cost of services sold. What does it cost you to deliver your legal services? This is your cost of services sold and will include direct costs such as salaries paid to paralegals or gas and travel, as well as indirect costs such as wages paid to support staff for a specific matter.
- Operating expenses. These are the expenses required for normal business operations, including rent, insurance, salaries, and marketing.
- Profit margin. This is all of your firm’s revenue, minus expenses, expressed as a percentage.
- Gross profit margin. This is the percentage of revenue that exceeds the cost of services sold. It relates to how much money you have left after you pay all of your expenses related to selling your services. If you don’t have enough gross profit, you don’t have enough money to pay your operating expenses; that’s a bad deal.
It’s important to note that your salary isn’t optional. We’ll say it louder for the people in the back: your own salary isn’t optional.
Make sure you include your fair market salary in your budget. After all, you should be getting paid for your hard work.
Law Firm Budgeting While in Startup Mode
We want to take a quick moment to speak to those of you who are just getting started with building your firm. To be successful as you attempt to grow your firm and get your finances in order, you must find the right help, the right technology, and possess the right mindset.
The budget you create from the outset will affect all of your business decisions, so you must be clear on how it works. It’s true that your sources will be limited at first, and every dollar you spend before your first client will need to come from you or a form of debt. The only way to make smart decisions on where to turn first is to create a law firm budget.
We recommend investing in tools and efforts that support you in finding your first paying client. Then, focus on delivering excellent client service, getting paid, and using that success to find your next client. Walk before you run, young grasshopper.
How to Create Your Law Firm Budget
I’ve struggled with knowing whether or not my business is successful. I have many clients, have achieved several recognitions and been recognized locally as a resource, but that has nothing to do with knowing if I am successful in a business sense…
One of our Labsters, Lisa, struggled to see the importance of her success when she couldn’t see the numbers. The surefire way to discover the health of her firm was to create a budget and plug-in those important numbers.
Start your own budget by putting together a spreadsheet, broken down by month. You’ll need to list your uses—those things you need each month—and the sources—where the money comes from to obtain them. In other words, you’ll need a list of your expenses and how you plan to pay for them.
But don’t stick with the spreadsheet forever. When you’re ready, you’ll want to transition to automated budgeting software.
Next, research industry standards. We recommend researching the standards for things such as service pricing, fixed and variable expenses to expect, and unexpected variables you might see each year. These items will differ depending on where you are in your firm.
After your research and considering your current firm, you should have a list chock full of items to include in your budget.
At LabCon, we had an assignment to plug in our numbers. After all the formulas and data was input, I had a surprise: I was ‘making it’. My fears vanished as I realized how much work I was actually doing, how many people I was helping and how much money I was making.
Lisa’s new financial outlook inspired her to keep moving forward. This is the insight only a solid budget can deliver. Be like Lisa. Plug-in your own numbers, creating your budget draft.
Your Income, Revenue, and Profit
First things first, it’s important to not only track the money coming in, but your money going out. When it comes to income, you must understand the difference between revenue and profit.
- Revenue. Your revenue is the total amount of income you generate through your practice, before taking expenses, operating costs, and the like into account.
- Profit. Your profit is the amount of income you have left after all expenses, operating costs, and more. Profit is also known as your “bottom line.”
Determine Your Realistic Revenue
Instead of trying to make an educated guess, we like to start from the opposite direction. Consider how much profit you’ll need to make this year to reach your practice goals. Then, continue to break it down into chunks for each quarter, month, week, and even day.
Start by estimating how many clients you’ll earn in a year, how many matters you’ll open for each of them, how much you’ll charge for each matter, and the average revenue you can expect from each. Don’t pull your hair out here—it’s only an estimate.
Gather Your Income Sources
If you’re a new attorney, your income sources may include personal savings, credit cards, or bank loans. If you have a stable practice, your sources may include hourly earnings, flat fees, consultation, referral fees, and more.
Tally these sources together for your budget. Remember to be careful with your math and remain conservative.
Keep an Eye on Your Profit
We must always keep an eye on our profit margin to see how it compares to our revenue and expense streams. Why? It’s a key indicator of our firms’ financial wellbeing. If you follow it, you’ll be able to tell which revenue stream is most successful and which expenses are taking a toll on your bottom line.
With these insights, you can finally budget and plan accordingly for the future.
Your Costs, Expenses, and Spending
Proper budgeting includes the good, the bad, and the ugly. Both costs and expenses are subtracted from your revenue. Expenses are typically business costs that are the same each month, also known as fixed expenses. Your costs, also known as variable costs, scale up or down depending on a wide variety of factors.
Estimate Fixed Expenses
The next step in preparing your budget is to estimate your fixed expenses. For us, these include items such as internet, fees, software, bank fees, mobile phone service, website hosting…the list goes on. Take stock of everything you need to run your business each day and decide which of these things are fixed costs you must pay for each month.
Predict Variable Costs & One-Time Spending
Not everything within your budget is predictable. In fact, variable costs can crop up at any time. Variable costs don’t have fixed prices each month. Examples of variable costs include:
- Travel, events, and conferences
- Malpractice insurance premiums
- State bar licenses
- CLE credit
Your budget should include cash set aside for these items in advance. Take some time to consider any variable costs you might accrue each week, month, and year.
There are also one-time costs that can add up quickly over time. One-time costs—or infrequent costs—might include:
- Hardware such as a computer, scanner, printer, etc.
- Website design
- Office furniture and supplies
- Business cards and letterheads
It’s smart to include anything you want or need to buy for your law firm on your budget; remember to be intentional. Set aside some of your budget for these items, so you’re prepared in advance. Don’t let a broken computer result in costly firm downtime.
Add in Some Cushion
As business owners ourselves, we know that business is unpredictable. That’s why we take every number on our expense side of our budget and add five-to-ten percent. We also do the same on our revenue side. This ensures we have some necessary cushion available for whatever cost or random expense comes our way.
Take Time to Readjust
If you’re missing your budgeted numbers, you can reduce expenses, delay one-time purchases, increase sales through more aggressive marketing or advertising, or lower your profit expectations. When you know and monitor your budget, you can quickly see when you’re off target and cut costs or make strategic investments to increase revenue.
As your budget year crawls on, you can adjust numbers to more accurately reflect reality and plan the rest of the year accordingly. Trending significantly ahead? See what strategic opportunities you have for reinvestment and plug those into your budget.
Once it is on the spreadsheet as a budgeted expense, you’re much more likely to actually spend it, rather than just waiting until the end of the year and paying yourself more just because there is some money lying around. If you’re trending behind, it is better to know sooner rather than later so you can react accordingly.
Think About It & Talk About It!
Finally, think about your law firm budget regularly, and talk about it transparently with anyone you trust and who will listen. This is absolutely true for any other partners in your business. But we would argue that it is also a great topic for discussion with your whole team.
We recommend a monthly reconciliation between your budget and your reality. Manipulate your budget spreadsheet to include columns for your actual monthly revenue and expenses and a place to show the delta between your budget versus your actual. If you’re missing your numbers, use conditional formatting to show those numbers in red to call your attention to them.
Using Your New Law Firm Budget
One of our Labsters develops a financial scorecard based on the budget that they share with their firm on a quarterly basis to help them understand their financial position. Other Labsters follow a budget to make necessary business decisions.
For example, if they’re consistently missing their budgeted numbers, they may reduce their expenses, delay a one-time purchase, or increase sales through more aggressive advertising. The only way they’re able to make these decisions is by having a budget.
Your budget will help you plan, strategize, and shift as you need to, helping you grow a financially healthy law firm. Each month, take some time to reconcile your budget compared to your reality, making changes that benefit your bottom line. And don’t worry—you’ll get better with practice.
Take Advantage of Law Firm Budgeting Tools & Professional Help
We believe that to be successful with any new endeavor within your firm, you need the right technology and the right help. There are many tools available on the market made specifically for attorneys that can help you manage your practice, track your finances, and, of course, help you create a solid budget.
Of course, we also believe you can’t do this alone and you shouldn’t have to. We know it’s overwhelming. Before you throw your firm in the air like you just don’t care, we recommend investing in a consultant who can help. An accountant can help you create a budget for your firm and help you forecast your finances.
Stay on Track to Reach Your Law Firm’s Goals
“Taking the time to track the numbers revealed so many unknowns to me. I was able to see how effective I was being and what was catapulting my business forward.”
Remember Lisa? The result of her efforts helped her to understand what was moving her business forward. By leaning into those insights, she’s able to continue building a financially sound firm.
What could you do if you knew, without a doubt, that your firm was financially sound?
Budgeting is worth pushing through the discomfort and frustration. And you don’t have to do it by yourself. Instead, join us by becoming a Lawyerist Insider today.