Law firm budgeting is an important part of running a firm. Money comes in and goes out of firms fast, and while you may have enough to keep the lights on and make payments, a lack of a budget can also hinder your growth.
However, you’re running a firm, and with little time as it is, setting up a budget is low on your priority list. It’s also difficult to budget when you don’t know where to begin.
A solid plan can set you up for a successful year, and the most important thing you can do right now is just start.
Taking the “Something is Better Than Nothing” Approach
Starting a budget is intimidating when you look at all of the sections and have to dig into your forecasts, expenditures and historical data. What we recommend you do is start somewhere, even if that means:
- Listing your average income
- Reviewing your marketing spend
- Knowing your average revenue per case
- Listing your major expenses (rent, utilities, annual bar dues, taxes, software subscriptions, insurance, etc.)
Start by brainstorming your expenses and project your revenue. Over time, you can go back into your budget and start fine-tuning things. You might forget to add insurance expenses and some software expenses, so add them to the budget as you go along. But don’t forget to add your marketing, rent and payroll expenses – probably your three highest expense items.
Reflect on and make changes throughout the year. You may experience economic ups and downs or organizational changes throughout the year, and that’s okay. Starting with a basic budget is better than nothing.
If you want to create a more robust budget, consider the sections below.
What Sections Should Be Included in a Budget?
A robust budget that accounts for nearly everything is time-consuming to create, but it’s worth it when you can plan for the year ahead. You should try to add the following sections to your budget over time:
- Revenue projections: Your revenue projections should include all sources of income and account for variables such as economic growth and projected demand. If you have historical data, you can create a basic projection that accounts for last year’s revenue multiplied by growth compared to the previous year.
- Operating expenses: Categorizing your operating expenses will take time because you may overlook insignificant expenses. But some of the items to add are rent, utilities, insurance premiums and licensing fees.
- Compensation expenses: Staff and yourself need to be paid. You can add in salaries, benefits, bonuses and any other perks you offer.
- Marketing expenses: Add in all of your marketing expenses, such as SEO, social media marketing, commercials, flyers and any other form of marketing you engage in.
- Infrastructure costs: Computers, software, phone systems, furniture, office supplies and all other related items are part of your infrastructure costs. Even office decor fits into this category.
If you have access to your firm’s historical data and trends, it will be much easier to run revenue projections and account for expenses accurately.
How Much Money Should Be Going To Each Section of Your Budget?
Allocating resources to your estimated expenses will help you better plan for the year ahead, but every firm’s expenses are slightly different. A general rule of thumb is that:
- Marketing budgets tend to be 5% to 15% of revenue, based on the size of your firm.
- Office furniture and supplies can account for 4-6% of your budget.
- Salaries and compensation generally account for 35-45% of a budget.
- Technology and software can be 5% to 10% of a budget – an area we are seeing grow as firms invest in AI to improve efficiency and profitability.
- Office space, utilities and the like can be 8% to 15% of a budget.
Work with a bookkeeper who understands law firm businesses to help you reach your growth goals and make it easier to create a working budget specific to your firm.
How To Track Ongoing Progress for Areas Of Improvement
Your firm’s goals will dictate how to track your ongoing progress. For example:
- Increasing revenue may require you to track revenue per lawyer, billable hours, collection rate, utilization rates, and profit margin.
- Increasing client revenue may mean tracking client acquisition costs (CAC), lifetime value of a client (CLV), retention rate and other KPIs.
- Reducing expenses helps improve profit margins and boosts financial health. You may want to track expense-to-revenue ratio, cost per billable hour and others to keep expenses down.
Monthly or quarterly reports will help your firm track expenses, account for higher or lower revenue and make critical adjustments to keep profit margins within your ideal range.
QuickBooks’ recent survey found that 43% of small business owners report that cash flow is a problem for their companies. For firm owners who want stability and growth, a budget acts as a vital tool that you can refine over time to improve your firm’s financial health.
Start somewhere and begin taking control of your firm’s finances. Track and monitor your progress to pinpoint areas of improvement and work with a professional along the way to free up time to focus on other critical tasks.
Contact us or call us at (513) 334-5076 to learn how we can help with your law firm’s budget.