If you don’t have a budget, your firm could be at risk. But with a solid spending plan in place, your bottom line is protected—no matter what’s around the bend.
A detailed budget provides essential guardrails for your law firm, no matter your size, revenue, or experience. Even if you have decades of legal work under your belt or your law firm earns the most revenue in the state, you need a budget to:
- Anticipate cash flow
- Set fair but profitable rates
- Manage unexpected and recurring expenses
- Make well-informed business decisions
- Plan ahead for predictable lulls in casework
To accomplish these roles, though, your law firm budget needs to not only align with your firm’s goals and objectives but also reflect economic conditions. As you explore the budgeting basics outlined below, consider your law firm’s current financial situation, as well as any ambitions you have for the future. You might also choose to review industry trends to ensure your budget and financial goals are realistic and align with those of similar law firms.
Before you can establish a budget, you need a clear picture of what it costs to run your law firm. As you consider your expenses, make sure you include:
- Fixed expenses
- Variable expenses
- One-time expenses
- Recurring expenses
While some small or occasional expenses might seem insignificant, it’s crucial to be diligent. Make a list of them all for the most accurate result.
Note: if conditions are in flux, it’s tempting to overestimate rather than underestimate your projected expenses. Keep in mind that this can create budgetary slack, which can result in decreased efficiency, lower growth and profits, and increased difficulty in making planning decisions. Strive to be as accurate as possible!
Costs that don’t change from month to month (or year to year) are called “fixed” expenses. They’re predictable and don’t tend to fluctuate. Make a list of all of the bills that you pay regularly to keep your firm running, including but not limited to:
- Office space
- Employee salaries
- Certain utilities (phone, internet, etc.)
- Practice management and other software subscriptions
- Hardware (computers, copiers, etc.)
- Fees (malpractice insurance, bar dues, memberships, etc.)
The TimeSolv Guide to Better Matter Budgeting
Budgets are the unsung heroes of a successful law firm. Budgets structure business planning, client services, and ultimately help you increase profitability. And an effective law firm budget starts with effective planning.
Variable expenses are costs that change from month to month. For example, you might spend $50 on restocking office supplies one month and $125 the next. Professional development and training opportunities are another example—you might opt for an expensive retreat one year and a simple online webinar the next. Other common variable expenses include:
- Travel fees
- Marketing costs
- Postage for mailed documents
Due to their inconsistency, these variable expenses may be difficult to forecast. If you aren’t sure how much room you should leave for them in your budget, try reviewing how much your firm has spent on variable expenses over the past few years.
Anticipate the unexpected
As an attorney, you’re trained to never promise a specific outcome to your clients. Your law firm budget is similar, in a way—you should never count on things working out exactly as you hoped.
Things happen. You might overlook an overhead expense while planning your budget or your local legislators might suddenly impose a higher tax on businesses. Make sure there’s some “padding” in your budget to pay for unexpected expenses.
Projecting your annual revenue
Once your costs are all mapped out, decide how much money you can safely expect your law firm to make.
Again, aim to be realistic, rather than optimistic, about your revenue goals. An overly generous estimate could lead to an unrealistic budget, a false sense of security, and poor business planning decisions that could, in turn, put your practice in a tight spot.
Setting your hourly rate
Your firm’s projected revenue has a lot to do with your rates. Charging the right amount is essential to ensuring that your firm is profitable—charging too much can drive away clients while charging too little can make it difficult to cover your operating expenses.
Calculating matter costs for flat fee billing
Client demand for fixed-fee arrangements has been on the rise in recent years. When managed correctly, flat fee billing can be a win-win for your firm and your clients. It may even boost your revenue and lower your AR since it helps clients plan for their legal costs in advance. However, detailed matter budgeting is essential for successful fixed-fee arrangements.
Establishing a matter budget
You can think of a matter budget as a micro version of your firm’s primary budget. The key distinction is that it’s a detailed map of the tasks and associated costs necessary to complete an individual client matter, rather than an entire year’s worth of them.
As you create a matter budget, it’s important to consider not just the cost of completing that individual matter, but also the profit margin (“markup”) your firm needs to make on that matter to meet your larger budget goals.
In addition to your hourly rate and the average costs associated with each legal matter, take time to consider external factors that could impact your firm’s revenue, including:
- Economic conditions
- Changes to local laws or regulations
Tracking and adjusting your budget
Once you’ve created a budget that helps you manage your firm’s resources effectively, you’ll need a way to track and adjust it. Carve out time each month to assess your budget and compare how well your initial projections are stacking up against your actual costs and revenue.
Tracking every transaction so carefully can be time-consuming—even tedious. But with the right software tools on your side, it doesn’t have to be. Consider whether investing in legal time tracking and billing software, like TimeSolv, makes sense for your firm. In addition to monitoring expenses, this software can also reduce the time needed to maintain your budget by generating comprehensive budget reports in one click.
How TimeSolv Can Help
TimeSolv’s time tracking and billing software are designed to take the guesswork out of the law firm budgeting process. We offer a variety of powerful, easy-to-use budgeting tools to support your law firm’s growth, including:
- In-depth budget reports
- Robust integration with QuickBooks accounting software
- Streamlined time, expense, and payment tracking
- Profitable fixed fee calculations
- Data-driven matter cost estimates
To see for yourself how TimeSolv can help your firm become more profitable and efficient through better budgeting, sign up for your free trial today.