Budgets are key tools law firms use to manage day to day operations and finances. A law office budget is an important tool for success impacting the way that the firm makes decisions. Proper and adequate financial management allows a law firm to take advantage of opportunities by appropriate planning and budgeting. A law firm with a strong financial management policy will be able to ensure its obligations are properly met and that none of its work suffers due to a lack of funds. A firm suffering from cash shortages cannot take risks or may not be able to handle large cases properly. In contrast, a law firm which is well managed financially may be able to withstand difficulties even when faced with a downturn in activity. Generally, firms that are not well managed financially are not able to successfully survive long term.
To ensure a successful budget season and a reliable end-product, the budget process must be closely managed. Assistance should be solicited from key players who have the requisite knowledge and skills to provide input for their functional areas. Attorneys in charge of practice and/or geographic units must be brought in at the onset. Schedules need to be coordinated and calendars developed, highlighting key deliverables, so that all members of the budget team fully understand their roles. Communication is essential during the entire budget cycle – including the planning, development, and review phases. A budget planning or “kick-off” meeting can be an effective vehicle for explaining the firm’s strategic direction and for defining expectations.
Here are a few general tips for finance and budgeting:
- To best manage your cash flow, you need a monthly cash flow plan showing projected revenues and expected expenses for each month of the year. A cash flow plan is a living and breathing tool that reflects both what has actually happened relative to revenues and expenses and what you expect will happen in the future. It shows where you are now and where you will be in the coming months. By updating and reviewing the cash flow plan monthly (or more frequently), you will know how much revenue you will need to generate to cover expected expenses and can take steps to ensure that you have adequate cash flow.
- Consider putting aside a percentage of your monthly revenue each month until you have set aside an amount equal to one month’s expenses. This will be your "rainy day" fund whenever you have an unexpected expense or an unexpected dip in revenue.
- Establish a monthly draw of income based on what you think the firm will generate in net profit each month. You can take a second draw quarterly of any excess profit. Distribution of income should be based on the firm’s net profit. Avoid distributing more income than the firm’s net profit can support.
- Put aside funds monthly for large expenditures that are paid in a lump sum(s) each year, such as malpractice insurance premiums.
- Open three bank accounts – (1) an operating account; (2) an IOLTA trust account (discussed below), and (3) an account for your income and self- employment taxes, if applicable.
- At the end of each month, deposit 20-25% of your net income into the income tax account so that as your quarterly income tax payments come due, you will have sufficient funds to make these payments without depleting your ordinary operating budget.
- Aggressively pay down any debt you have and pay off your line of credit each year.
- Bill monthly.
- Aggressively manage your accounts receivable by sending letters to those who don’t timely pay their bills and following up with personal telephone calls if the bill is not promptly paid Consider prompt withdrawal, subject to ethical limitations if a client is ignoring your bill. For billable work, always obtain a retainer up front when at all possible.
- Automate your firm accounting function. In order to effectively manage your firm finances, you need information that is most easily obtained when the accounting function is automated by using appropriate accounting software. You and your accountant will appreciate the automated income and expense reports that are easily printed from your accounting software.
- Manage your personal finances with the same discipline as your firm. Avoid living beyond your means.
- Keep your receipts! Attorneys are audited at a higher than average rate. Keep receipts for any expenses you intend to write off.
Poor firm cash flow planning coupled with poor personal financial management can lead you to make poor decisions. Avoid the cash flow blues by putting these principals into place in your firm.
Pick one day each month and schedule a portion of it to review and get out your billing statements, putting the block of time on your calendar well in advance. Except for court-ordered appearances, treat this block of time as if it were a client meeting that should not be canceled or re-scheduled. All of your bills should be reviewed and finalized as efficiently as possible. (Avoid interruptions and distractions!) Keep track of the amount of time that it takes you to complete the task.
Cash Flow Projections
Standard Chart of Accounts
How to Prepare a Cash-Flow Budget – Michigan State Bar