Most lawyers in their private lives operate off a budget. Some may be much more formal about it and put it in writing. Others can generally add up their income and expenses in their head to ensure that more money is coming in than coming out. In this same way, law firms need to have a budget. Law firms need to work with an accountant or CPA to put together a budget for their law firm. Law firms then need to stick to it as best as possible.
The components of a law firm budget
The budget needs to include all of the expenses for the law firm. Expenses can be vast in number and can include payroll, taxes (federal, state, and local), insurance, rent, supplies, utilities, phone bills, marketing costs, bar and CLE dues, and charity.
Within each of these categories, there are often many subcategories. Insurance is one example. Most law firms in this day need all kinds of insurance: malpractice, general liability, workers’ compensation, crime and cyber, employment practices, disability, officers and directors, corporate and personal umbrella, etc.
Running and owning a law firm is expensive. No matter what the costs are, it is easy to underestimate them. Costs also go up yearly and it is rare that costs within a law firm drop.
At the same time, it is important to forecast the law firm’s income to ensure the law firm is budgeted to meet all these costs. Forecasting can be difficult because one never knows what might happen in a given year.
It is possible that the law firm can do significantly better than the forecast. Most law firms hope this will be the case. Sometimes, law firms can be overly optimistic. But it is often just as likely that the law firm can do worse than what was projected. Take a year like 2020, where something unexpected like a pandemic came to fruition.
Every law firm should have a budget
Regardless, a budget is vital for every law firm. Every year, a law firm should put together a budget and do their best to follow it. Otherwise, a firm can get themselves in serious financial trouble.
If expenses are going above budget for some reason, the firm needs to take affirmative steps to reign that in before it becomes a big problem. It is easy for most law firms to go vastly over budget on their expenses if they do not regularly track it and hold the line.
Regularly checking the law firm’s income to ensure that it measures up to what was projected is also vital. If not, a scenario can occur where the law firm cannot meet its financial obligations.
When a law firm cannot meet its expenses, this is where problems can begin. It might be that the law firm faces collection efforts, lawsuits, or governmental authorities because of their inability to meet their expenses. Ultimately, if it gets bad enough, a law firm might end up ceasing operations.
There are also reported cases where lawyers in financial trouble begin engaging in illicit behavior to meet their expenses. Of course, when that happens, this is when a lawyer’s license can be put in jeopardy.
To avoid all of this, law firms need to put together a budget yearly. The budget should be well thought out and account for best case, worst case, and middle case scenarios to ensure that the law firm’s obligations can be met no matter what takes place.
While managing a budget is not a fun task, and most lawyers would probably rather do just about anything else, it is vital to any law firm’s success. Most lawyers should also not create the budget themselves unless they have experience as an accountant or a CPA. An accountant or CPA can point out the missing pieces in any budget and help with the forecasting component of any budget as to future income.
Consider getting a line of credit
Most law firms can consider getting a line of credit if things go south. A credit line often allows the shareholders to access funds that they personally guarantee for temporary periods where the firm is not running according to their budget. A line of credit can ensure in a doomsday scenario that the law firm can continue operations for temporary periods until the firm can get caught back up.
However, most law firms indeed need to have a solid history of generating income and meeting expenses to get a line of credit. But this is all the more reason if one cannot get a line of credit now, to have a budget so that the firm can later show a bank that the firm is budgeted on a solid financial foundation.
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