By Elizabeth M. Miller bio
No one likes to prepare a budget. Looking ahead a year and seeing what it’s going to cost to run your law firm can sometimes be overwhelming, especially when you know that it’s up to you to make sure the firm generates the revenues to cover the budget. And with so many year-end things on your plate, strategizing for next year is probably the last thing you are thinking about doing right now. But it can prove to be the most important thing that you will do for your law practice for 2023.
3 steps to create a budget
By using your 2022 income and expenses you can not only get a good idea where your firm is going in 2023 (barring any surprises), you can also plan for growth and estimate what you need to do to be on target to achieve your firm’s goals for the coming year.
Here are three simple steps that you can use to budget and forecast for the financial health and wealth of your firm in 2023:
Step 1: Run a year-to-date total of all expenses that your firm incurred during 2022 through the end of November, 2022. Take the totals in each category and divide each total by 11. This will give you a baseline average of what your expenses cost you each month: rent, employee salaries, telephone, equipment leases, benefits, office supplies, etc. Be sure to include every category of expenses that your firm incurred during the year. While the totals will not be perfect, they will be close to accurate.
Step 2: Review the expenses from the previous year that have now been broken down into different categories. This is where you can tighten the budget and look for bleeding. Can you do a better job of shopping vendors for office supplies, process servers, equipment, etc.? Make sure you’re not spending more than you need to for services and supplies. If you really want to plan for the unexpected, consider including a miscellaneous or slush fund category. And if your firm pays percentage bonuses to its employees, be sure to include those bonuses as part of your expenses. That amount will likely fluctuate since it is tied to income, but again it will give you an approximate amount to work with.
Step 3: Prepare a strategy outline of where you plan to take the firm next year in terms of growth. Are you planning to add an associate or two? Do you need to expand your support staff? Are you considering moving offices sometime in the next 12 months that will increase the rent overhead? Project out what you will spend on an annual basis for any growth that you are anticipating and divide by 12. This will give you an idea of the added cost of growth.
If you calculate the monthly totals from steps 1 and 2 above in each category of expense, and make adjustments for growth or future anticipated expenses in step 3, this will give you a rough budget for 2023.
Revisit your budget monthly
Now a budget is really only good the day that it is prepared; it’s always subject to change.
Your budget will give you a snap shot of where your firm will be in 2023. And while it’s a good place to start, you must be mindful that the income projections are based on the previous year. During 2023, at the end of every month, review your expenses and income and compare it to the budget that you prepared. You can then make adjustments for the following months accordingly.
Conclusion
Every law firm accounting program that I have worked with gives you the ability to easily generate the reports that you will need to prepare a 2023 budget. So if you can computer generate these reports, there is really no excuse not to prepare a budget.
Financial planning is an important part of managing the business of practicing law. Do not fly by the seat of your pants. If you cannot do it, get someone who has the experience to prepare the budget and work with you on updating it as the year goes along. It’s your law firm’s money—manage it and don’t let it manage you!
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