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This article is for any law firm owner who wants to start or improve their budget.
So if you want to:
- Get motivated to FINALLY create a budget
- Learn the top nuggets from a law firm accounting specialist
- Make more PROFIT
Then you’re gonna love this post.
Ryan Kimler specializes in helping law firms make more profit through better accounting. We’re thrilled to have him speak on the importance of budgets and most importantly, how to get started.
Ryan Kimler is the Owner & Lead Accountant at Financial Clarity LLC. He specializes in helping law firms make more profit through better accounting.
My client said to me, “It seems like not all of the cash flow that I have earned is making it into my account.”
I asked my client, “Where is your budget? Do you have a plan for the year you and your previous accountant put together?” My client replied, “Oh no. I have never had anything like that, I make my purchase decisions based on how much money my bank account has in it.”
It still shocks me to this day; how many business owners operate this way.
Every business that exists on the planet should have a yearly budget and see if their plans worked at the end of the year.
Why Every Law Firm Needs a Budget!
Having a budget is the only way to effectively monitor expenses and find when recurring expenses have varied from the normal amounts. I highly recommend to any and all business owners that I meet that they need a yearly budget and they need to be monitoring that budget monthly, and sometimes semi-monthly.
What are the top 2-3 benefits you’ve been from having a good law firm budget?
The ability to benchmark and better track where cash is spent in the business is a great benefit for law firms.
Additionally, a great exercise for a small law firm is to build a bottom up budget, which means start with your profit projection for the year first, then enter your expense budget, and finally after that calculate how much profit you have to make in order to cover expenses and meet your profit goals for your law practice area.
Why do you think lawyers drag their feet on creating a budget for their firm?
I feel most lawyers drag their feet for one of two reasons. One, they don’t feel it is important or do not see the benefits and results that a budget can produce for their law firms. And the other reason is, accounting and budgeting is a part of their business that makes them uncomfortable. According to a 2019 study by Clio, 53% of attorneys are uncomfortable with the business side of their small firm.
The Key to Law Firm Budgeting is Taking That First Step
As a reformed budgeter myself, I can absolutely speak to the benefit of having your financial house in order. Our company continues to grow quickly, but without all of the common financial headaches of a small business owner.
It’s never perfect, but I can’t tell you how much better it is to possess the confidence of knowing we at least have a plan in place.
Law Firm Budgeting is Easier than you Think
For a law firm without a budget, what’s the first step they should take?
The best first step is to take a look at last year’s data. Is the data complete and accurate (Question for your Accountant)? If yes, then take last years numbers and start projecting where this year may be different from the last year.
Where should an attorney keep track of their budget?
It is best to keep your budget in your accounting law firm’s software so you can run a Budget Variance Report Monthly.
Take Control of your Law Firm’s Future by Starting a Budget!
A big misconception that I had during the first few years of our business was that it would be a huge project to get a working budget. I was wrong.
If you’re not a numbers person, this can FEEL like a big project. Like most things, worrying about your law firm’s financials is worse than the actual practice of managing them.
The best way to start is to speak with someone like Ryan as early as possible so that you have direction. They can give you insight based on where your firm is in the timeline of your business and make customized recommendations according to your practice area.
An Approachable Law Firm Budget Template
If you’re looking for a solid budget template, take a look at this standard budget, exported from a popular accounting software. This month-by-month budget spreadsheet should cover all of the basics and get you started.
What are the essential components of a good law firm budget?
First a good, reasonable projection on profits. Then, account for all potential expenses, recurring and one time. For help with the expenses look at the prior year.
Do you recommend hiring a bookkeeper? A CPA? Both?
I do not recommend hiring a bookkeeper. Hiring a bookkeeper is a very low level of accounting. I recommend finding an Accountant who is a specialist in working with law firms and can provide high level Management Accounting Services and Reports. The insight is much greater and with today’s technology, you can hire a remote specialist very reasonably and most likely less than what it would cost to hire someone in-house full time for your firm. Every budget really caters to the client. However, Ryan exported this standard budget from an accounting software to give us an idea about this. You can download it here for free
Considerations for the Solo Law Firm Budget
Are there any differences between a solo attorney’s budget and multi-attorney law firm?
The biggest difference would be in relation to payroll and distributions or owner pay. Obviously, a solo is only going to have to worry about their pay and other payroll is likely small. In a multi-attorney law firm payroll projections can be much more difficult to budget, especially if the firm has a complicated bonus structure. Additionally, for a growing firm, projecting payroll when the firm is adding attorneys can be very difficult as well. Finally, if the partners are taking distributions based on a percent of profit that can be difficult to project as well as profit is probably the hardest numbers to project in a good budget.