Before we start, let me be clear. If you do not have a budget that you review regularly, you’ve limited your potential—this is a fact.
The reality of the situation
Six in 10 legalprenuers I encounter have no budget. Of the remaining four, two of them have a budget but aren’t using it, one has the budget but you can’t see because it’s in their head, and the final one is someone who actually uses the budget to make informed financial decisions and holds the business accountable to its financial goals and limitations.
Budgets are kind of like opening a law practice; you can’t just furnish the office, put your name on the front door, and be done with it. You must be proactive and continue to follow up with operations, sales, and staff. It is one thing to have a budget and something completely different to use it.
First, you must address your perspective
When most people think about making a budget, they imagine that dreaded annual meeting where percent signs make you go cross-eyed and the hash symbol doesn’t mean hashtag. Numbers, lots of numbers too. We get it, a budget is when you plan on the money coming in and what that money is going to be used for. Simple stuff, so we say. Yet more than six out of 10 of you are flying financially blind.
Success does not just happen, it’s planned for. A budget is a plan and as with any plan, it’s useless if you don’t keep up with it. To carry out a proper strategy, you have to hold yourself accountable to the steps that must be taken to reach your destination.
A budget is your financial accountability buddy—so, it’s time to put our money where our mouth is. A budget should be empowering, create clarity, and provide you with a level of predictability and insight into the financial future. Take a moment to let go of the tedious work involved and focus more on the fruits of your labor.
Face the numbers head-on
There is no way to sugarcoat this, making a budget isn’t exactly an exhilarating experience. It’ll take your time and resources to get right. The important thing, though, is the result, the financial tool you find yourself holding; the financial clarity that will be one less pain point you as a business owner will have to endure, and one less thing keeping you up at night.
If you’re not using formal accounting software, take a look at this article so you can understand why pen and paper, Excel spreadsheets, or anything less than a formal accounting software isn’t going to cut it.
For some of you, that means finally hiring a bookkeeper. Getting to know your numbers is an investment in both time and money but it is one that comes with a guaranteed return.
You cannot manage what you cannot see and I’m willing to bet that cash is pretty crucial to your firm’s success. So, if you are hiding from your numbers, come on out and get yourself some financial clarity.
Start with sales
To allocate spending you must estimate how much money you have coming in to determine how much can go out. Estimating sales can be tricky due to the many factors you may need to consider.
- What were my sales last year?
- Am I on track to do more, the same, or less than last year?
- Where are my revenues coming from, EXACTLY?
The latter is an observation most miss. Many people fail to dissect the multiple revenue sources that make up total sales. You may be thinking, “well, I’m a lawyer so my revenues come from legal services,” right? Wrong. Do not do your revenue the disservice that comes with generalizing.
You may be an attorney, but you’ve chosen practice areas and within those are matter types that have predictable workflows based on the path the work takes. The point being, take the time to gain a deeper understanding of where your revenue is coming from and organize the numbers around those different streams.
Do not go getting lost in the revenue to the point of overwhelm and defeat. Do your best based on the historical data you have and the understanding of how your current actions affect your revenue. Do what you can and move forward and remember, this is a process. All we need is a starting point to measure against.
Expenses (the fun stuff)
The most recent world crisis has tested the limits of a lot of attorneys and pushed them to do what they viewed as not possible. Think about your spending and be careful what you call a “required” expense.
In my experience, the exercise of combing through and questioning the necessity of each expense can cut expenses on average 7%. So often we take on what I refer to as “band-aid expenses”. We often throw money out there looking for a quick fix rather than analyzing the options and choosing to integrate what we need with what we already have. We also get shiny object syndrome, mainly around software that promises efficient workflows to save time and money. However, the reality is that most will turn it into a band-aid that dries up and falls off because it didn’t really fit into the bigger picture. Many people don’t take the time to analyze their needs and find a solution that fits into the overall picture of where they’re headed.
Recognize your spending habits as you go through every single expense category and question its necessity. Mindset and habits around money are a real thing and reflect in your numbers. Do you spend money without exploring alternatives or making sure that it contributes to the overall goal of your firm? Or are you quick to throw money out looking for a solution and hoping it works instead of planning for success?
As you go through your expenses categorize them into one of three buckets, fixed, variable, and team expenses.
Recurring (fixed) expenses
These are the expenses that happen every month or year consistently. Things like rent, insurance, software fees, insurance, telephone and utilities, or accounting, to name a few. These are the predictable, consistent, and recurring costs to do business. These do not include marketing or wages, we’ll get to those later.
Once you’ve identified your recurring fixed expenses. Go through them and question whether or not they’re required. I encourage you to solicit your team for feedback on the effectiveness of things like software. They have insight into the moving pieces of your firm in a way that you may not, and that is extremely valuable.
Ask questions such as:
- Are you underutilizing a software platform which leaves room to find a more suitable alternative that costs less?
- Is a brick and mortar office really what you want or does a more remote model seem like a reasonable alternative?
Re-evaluate all of your fixed expenses in a way that proves their worthiness of your cash. You may find quite a bit of fat to be trimmed.
Typically, these are the expenses parallel to revenue. They go up as revenue increases and they trend down if revenue trends down. This includes advanced client costs, merchant fees, marketing expenses, or travel expenses. These are easy to view and budget for as a percentage of revenue. Merchant fees, for example, are typically between 1% and 3% of revenue depending on your rates and invoices paid by card vs. check or cash. Historical data can reveal those percentages in your firm and be estimated in a budget as such.
One area I would like to speak to specifically is marketing. This is a beast. See, most of us start with the slot machine approach. Throwing money at marketing and holding our hands out waiting for the monetary results. While it’s ok to start this way, you want to have a system in place that measures results in a way that directs you towards the vending machine method. This is when we can put a quarter in and predictably get a candy bar out.
Getting to this point takes time, and I encourage you to start with a percentage of revenue. Set 5%-10% aside for marketing and test the waters until something produces. Once you identify what works, focus on it and invest your marketing dollars towards the vending machine.
Once you’ve identified your variable expenses as a percentage of revenue, comb them over exploring ways to lower costs. Ask your merchant provider for a rate review in an effort to save cash on the credit cards you process, for example. If client advanced costs are eating up your cash, look at restructuring your terms to cover the cost until fees are collected. There are plenty of options here but you won’t be able to see them unless you understand your finances as they are now.
It would be wise to take the most time on these. Just like we think a brick and mortar office is the first step to starting a business, we can fall into similar assumptions when it comes to our team. A lot of you will hire butts to sit in a 40-hour-per-week chair when the work does not require that much time. Attorneys are overpaying in this department by an average of 60%. Why? The answer is that you don’t have a clear visual of the work that needs to be done in terms of time so you’re just hiring help instead of strategizing each position and its duties in a way that creates efficiency.
We live in a world where you can piece work out into specializations, as needed, and most of you are not leveraging that. For example, we feel the need to have someone in the office to answer the phones. They sit at the front, maybe handle some administrative duties, but their main job is to be the face and the voice. You’re paying someone 40 hours a week to answer the phone which is only accounting for 10 of those 40 hours. I’ve worked with firm owners who were in this situation until they realized there was an alternative.
My client, Sharon had been in business for herself for five years when we started working together. We started to pick apart her team and the duties tied to each position, then we got to her receptionist. Sharon had originally hired her to take phone calls and greet clients who came to the office. To fill her time, Sharon had also trained her receptionist to do some administrative work such as email management, overseeing the calendar, and document management. As we began to pick apart this position and look at the alternatives, Sharon realized that her $35k-salary, 40-hour-per-week receptionist position could be pieced out between a call answering service and a VA for half the cost.
Sharon was a one-woman show and had been drowning in work that the receptionist didn’t have the skillset to take on. With the money Sharon saved, she decided to hire a part-time paralegal who took on some of the administrative work that could not be delegated, on top of some of the billable work Sharon had been doing. This allowed Sharon to scale to the next level.
So as you go through your team expenses, let go of what you think you know and be open to alternatives that this day and age have made available to us as business owners.
Once you outline these three buckets of expenses, you will find yourself with a budget. Now sit back and look at the numbers. Do they make sense? Are you expense-heavy compared to the amount of revenue you’re bringing in? Where can adjustments be made? How can you maximize revenue, increase margins, cut unnecessary expenses, and set yourself up for scalability?
Creating a budget is a process, and no it’s not always a fun one. The payoff is in the follow-up. Once you’ve come up with a budget you have to hold yourself accountable to it. This means reviewing it every month and picking apart why things did or did not go to plan. From this process, you can become more attuned to your firm’s cash flow patterns and more sensitive to the control you really have over it.
Did you enjoy Chelsea's blog? Let her know by leaving comments or questions in the Comments Box below! You can learn more about improving your law firm's financials by reading her blog, "How to Calculate Profit Margins for Law Firms: Why Knowing Yours is a COMPLETE Game Changer".