When launching a new business, a strong business plan is crucial. For new law firms, the founding partners should work together to create a business budget that sets up the firm for financial success. A strong budget can be the difference between a firm that lasts decades and one that sputters out within a year or two.
While collaboration between the partners is key, many law firms can also benefit from enlisting some outside help from a consultant. At 3Sixty Consulting Group, we are experienced in helping burgeoning law firms develop a roadmap to success, including a strong budget and other aspects of a successful business plan. Contact us today at (404) 398-3888 to learn more about how establishing a solid and reliable budget can help you grow a successful law firm.
The Importance of a Law Firm Business Budget
According to the Bureau of Labor Statistics, approximately 20 percent of small businesses will fail within their first year. Small law firms often fail due to inadequate planning, including mistakes in the business budget aspect of planning. A well-constructed business budget can help the law firm set expectations for how much cash flow and expenses they can expect to see each year, which can help the firm plan by setting revenue goals.
Understanding Law Firm Expenses
Estimating a law firm’s expenses should be the first step in drafting a business budget. Once the law firm knows its operating costs, the partners can start to develop a smart spending plan. If a law firm skips this step and creates a business budget entirely based on expected revenue, the firm could run into serious trouble later if they realize they need more money for their operating costs.
The budget should be set to an amount that allows the business to increase its revenues and profits sufficiently as the business continues to expand, while simultaneously managing to keep up with increasing expenses that often accompany growth. It is virtually always preferable to overestimate costs rather than underestimate them. For new businesses, start-up costs must also be considered.
Types of Expenses
Most expenses for small law firms and other small businesses will fall into one of the following four categories:
- Fixed – Expenses that stay the same regardless of revenue, such as salaries, rents, annual bar dues and malpractice premiums.
- Variable – Costs that fluctuate based on how much the business is producing or selling, such as bonuses, benefits, and travel.
- One-time – The startup costs necessary to get the business off the ground, such as buying equipment, hiring someone to design a logo or website, and fees for permits and licenses.
- Unexpected costs – Business owners should set aside money for unexpected expenses, such as repair costs, equipment replacement, and growth-related expenses.
Many first-time business owners find it difficult to accurately plan for their expenses. At 3Sixty Consulting, we draw on our past experience in helping launch successful firms to help new ones accurately plan for their futures.
Setting Revenue Projections
After the law firm partners have a solid outline of expected expenses, it is time to try and project annual revenues for the firm. Revenue is the total amount of income the law firm can expect to generate before accounting for expenses and operating costs. Profit is what the law firm has left after all expenses and operating costs have been accounted for, otherwise known as the “bottom line.”
Projecting revenue may seem overwhelming at first, but there are a few steps new law firms can take to arrive at a realistic revenue estimate:
- Estimate how many timekeepers you can expect to have per year
- What is the expected billable hour for each timekeeper?
- What is the expected billable rate for each timekeeper?
- What are the expected fees from alternative fee arrangements?
Remember that these are only estimates. It may not be possible to narrow down your expected revenue with pinpoint accuracy, especially in the early days of the business.
Consider Possible Seasonal Variance
A business budget for a law firm should also consider whether there will be variations in revenue throughout the year. Some law firms may see a sharp uptick in matters during a certain time of year. For example, a tax law firm will likely see many more clients between January and April. A personal injury law firm in an area with harsh winter weather may take on more cases during the winter.
A strong law firm business budget should account for this potential seasonal variance. Doing so can help the partners have a better understanding of the big picture and set expectations for the year as a whole. However, it may not always be easy to account for seasonal variance, especially for new lawyers. This is where assistance from a law firm consultant could prove invaluable.
Keeping Track of the Business Budget
Once you create a business budget, planned expenses and revenue should both be regularly tracked. Business partners can compare the results of the business with the projections they made during the planning stages, which can offer insight into any changes that should be made to help the business turn a bigger profit. These days, most businesses rely on software to handle this process, along with conducting regular formal reviews of the budget.
How 3Sixty Consulting Group Can Help With Your Business Budget
Business owners often value their independence above all else, which is why they decided to go into business for themselves. However, directing your business through financial matters does not need to be handled completely alone. There are many pitfalls that must be avoided in order to ensure your small business is not one of the many that fail in its first year in operation.
The 3Sixty Consulting Group helps build and grow small businesses in a variety of industries. Founder Chris Echols has experience as a CFO, COO, and CEO of two AmLaw 250 law firms and has partnered with legal management consultants to give the client a best in class level of service. Chris and his team understands what it takes to launch a successful firm and to ensure continued success throughout the years. For more information on how to create a business budget for your law firm and other business concerns, contact us today at (404) 398-3888 for a free consultation.