Budget Building For Small Law Firms

Law Firms
How much does it cost to run a small law firm? You may think that a few thousand bucks could cover everything from rent, insurance, software, to internet costs, but before you come up with a list of potential expenses to deduct from your first sales deposit, let me stop you to say you’ve got it backwards. When building your budget, the first thing you should ask is not about expenses, but this: how much profit do you want? 

According to Mike Michalowicz's book, Profit First the old formula used to be “Gross Revenue minus Expenses equals Profit”. But his new formula is something I wholeheartedly agree with:  “Gross Revenues minus Profit equals Expenses”. You should only pay your bills AFTER you take profit.

Based on my years of experience as a law firm management consultant, I share with you some budget building tips to match the profit you’re aiming for. Once you know what you’re aiming for 

Answering the question of how much profit you want requires you to critically assess which elements are crucial for your law firm growth. This guide will help you understand the secret sauce behind every successful law firm: what budgeting means, why you need to make one, and how you should do it.

A law firm's budget includes different kinds of expenses from equipment, software, overhead costs, and down to insurance and each law firm budget should be tailored to its needs. For example, new managing attorneys who just started their own private practice will need more supplies as compared to established businesses. They may also be able to get discounts from insurance companies to cover malpractice lawsuits or get discounted bar dues. 

Aside from these things, your law firm’s practice area, say personal injury, will also require different software as compared to another firm composed of estate planning attorneys or bankruptcy lawyers. 

Why create a law firm budget?

If you already opened your office doors to clients and realized you don’t have one, it’s not too late to have your law firm budget documented on paper or file. Head attorneys should have a budget for their business because it enables them to do the following:

  • Set the law firm’s cash flow and expense expectations at the end of the fiscal year
  • Set revenue benchmarks that will serve as “standards” when evaluating whether goals have been met or not.
  • Prevent underspending or overspending. Going over the operational expenses, in a worst-case scenario, can lead to laying off personnel and even closing down the office
  • Saving up funds to cover lump-sum expenses such as bar dues (annul), malpractice insurance premiums, taxes, and research 

How do you start creating a budget?

#1 Decide how much profit you want to make

Law Firms Although this may go against what you have traditionally followed, you will soon realize that thinking about how much you want to make first can make your firm more profitable in the long run. One of the biggest challenges that entrepreneurial attorneys face is to answer how much they should pay themselves. Thinking about how much profit you want to make should not be done on the side. If you want to learn more about this, check out the Profit First system.

Aside from thinking about how much you want to make for yourself, have an accurate projection of how much you need to provide fair compensation for your staff. 

#2 Make an inventory of all resources and expenses

The next thing you need is to list down all resources that you have, plus other expenses. This covers your starting capital, equipment, and office space. Make sure to indicate whether each expense is incurred only once, monthly, or annually. 

You can ask yourself these helpful questions: (1) will the purchased item save up time that can be spent doing more important work? (2) will it help speed up the Perfect Client Life Cycle you’re aiming for? If you answered YES to both, the benefits outweigh the costs! IN addition, evaluate which goals are important to the business. Ask the following questions:

  • How much advertising do you need?
  • Can you answer potential client calls and emails or is an assistant necessary?
  • How much are average personnel rates in your area? 

Here are mandatory expenses to consider in your financial plan: state or local bar association fees, malpractice coverage, rent for office space, internet connection, utilities, hardware (laptop or desktop, backup drives, printer, scanner, fax or telephone), or legal case management software (and other types such as business and accounting software), cost of advertising (either through pay-per-click or social media ads) and networking events.

#3 Track all expenses

Start a habit of documenting all expenses and revenue. There are plenty of software solutions you can use such as QuickBooks Online, or simply use Microsoft Excel or Google Sheets. Then, when you get into this habit, set a regular time to review the budget plan. If you are just starting out, you can set it every month so that you can adjust your projections accordingly to cover things that you did not anticipate. 

Law Firm Financial Management: Best Practices

If you are already following the three steps outlined above, then here are a few more best practices to help with your budgeting needs. 

  1. Apply discounts whenever you can. New lawyers often get lower rates for their bar dues, and there are several insurance companies that offer discounted rates if you choose to pay annually. There might be local bars offering discounted malpractice insurance rates. There is no shame in jumping into these deals, and you can even consider getting a credit card to spread out your expenses.
  2. Have a contingency budget. Start setting aside a regular amount of money to cover a potentially unforeseen lump sum payment (such as malpractice suits). You can just project the amount of “big hits”, divide this by 12, and save up that amount every month. 
  3. Backup your files. This may not be top of mind, but equipment may fail and when they do, trying to recover your data and files will cost a lot if you don’t have a fallback plan. A cloud storage service such as Google Drive, One Drive, or Box can be used for data backups.
  4. Avoid purchasing the latest systems. You don’t need to buy the latest software releases if your law office does not benefit much from these things. Invest only in the system or hardware specs that will improve your firm’s efficiency. 
  5. Use smart tools whenever possible. Not purchasing the latest apps or management systems doesn’t mean going manual on your processes. If a software platform will save you time doing work. Then consider getting the monthly subscription. 
  6. Avoid debt! Spend the minimum amount that you can when building your own law firm. 
  7. Automate. You should systematize every repetitive task like answering emails, reminder calls, data capture, and appointment setting. The more you automate processes, the more time you save to focus on the more important things.
  8. Invest in marketing. Unfortunately, this is often seen as expensive and not worth its expense. Traditional marketing can’t cut it anymore given the rise of search engine companies like Google and Bing and the prominence of online marketing. 

Spend less, Gain More for your Firm

Aside from trimming unnecessary subscriptions, tools, software, and supplies from your budget, you should divert your funds for marketing campaigns. If you are just starting out, you can allocate just a tenth of your budget (after taking out the profit!) for advertising efforts and calculate the return on investment first before spending thousands of dollars promoting your law office. 

Start with a website that can help you reach clients, convert them into leads, and increase your brand awareness. You may also consider advertising your firm on third-party sites. There are several free listing plans or low payment options to choose from such as Avvo (Free, Pro, Premium Directory Listings) or FindLaw Directory. 

In terms of keyword or content marketing, you can explore Google Adwords, a popular advertising channel for attorneys. There is also Bing Pay-per-click (PPC), Facebook Ads, and other social media channels.  

Free Advice from a Law Firm Management Advisor

Still haven’t created your law firm’s budget yet? Start now!

Legal systems expert Richard James knows that running a law practice is brutally hard, which is why he is offering a law firm audit service to identify what are the most important systems and resources that you already have and should have, to get your legal business growing. Schedule your FREE personalized practice growth plan today.

Richard James

As a result of his track record for achieving what most describe as “phenomenal” growth rates for his clients, Richard James, CEO of Automated Business Results, LLC, is quickly gaining a national reputation as “the Legal Systems Expert.” His secret to success is simple. Richard has devised a seven step system for designing and implementing automated marketing systems that grow your business FAST. If you’re looking to develop a practice that supports your lifestyle rather than completely undermining it, call Richard James today.

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