Start Your FREE Membership NOW
 Discover Proven Ways to Be a Better Law Office Manager
 Get Our Weekly eNewsletter, Law Office Manager Bulletin,
    and MUCH MORE
 Absolutely NO Risk or Obligation on Your Part -- It's FREE!



Upgrade to Premium Membership NOW for Just $27!
Get 3 Months of Full Premium Membership Access
Includes Our Monthly Newsletter, Office Toolbox, Policy Center, and Archives
And MUCH MORE!
INCREASING PROFITS

If you’re ignoring these 6 rules, you can kiss your budget good-bye

It’s that time of year when law firm administrators need to “calmly and carefully consider how they are going to invest their resources to meet next year’s expectations,” says business and financial management consultant Gene Siciliano, CMC, CPA, of Western Management Associates in Los Angeles.

And the only way to do that is with a realistic and workable budget.

Drawing one up is not an easy process, says Siciliano. Done right, it can take a few months.

For that reason, Siciliano recommends starting the job no later than October for a calendar year firm. Wait longer than that, and chances are the firm will go into January “just winging it” with nothing to follow until February.

“It’s important to recognize what budgeting is and what it does,” he says. It’s a way to decide in advance how the money ought to be spent. And then it’s a way to monitor the spending so the money gets spent as it was intended.

How to create a basic budget

The budget itself doesn’t have to be an elaborate document. A spreadsheet with the months at the top and the revenues and expenses down the side is sufficient.

The line items can be as detailed as the firm chooses, but essentially the revenues need to be broken out by individual practice groups or individual billers, and expenses need to cover the major categories of labor, rent, office expenses, line of credit costs, and so on. The sheet then shows the total anticipated revenues, expenses, and profit by month and year.

Even basic budgets need these six rules

Simple as it is, however, budgets are easily skewed and misused. Siciliano lists six rules to keep the firm free of the budget problems that most often crop up.

Rule #1: Be realistic

Optimism is great, but Siciliano cautions against being unduly optimistic about the revenues. Many a firm sets its business plan on what it made the last year, but it’s important to be realistic so that you will not end up unpleasantly surprised.

While a good budget does require looking at the revenues and expenses of the past year or two, it also requires looking at the changes that have occurred and taking into account how those changes will affect the numbers going forward. If the firm has lost a client or added an attorney or renegotiated the lease, those factors have to be taken into consideration.

Siciliano’s advice is to create two budgets—one with a best-case revenue scenario and another with the worst possible scenario. With the latter, be blatantly pessimistic. Count in any suspected client loss as well as any suspected partner shake-up that could cause the firm to lose business. Don’t count going to court if the client is likely to settle.

Rule #2: Go into the trenches

Get the billers involved in the estimating process. “The bean counters can’t do it in a vacuum,” says Siciliano. It’s the people earning the revenues who best know what those revenues will be.

“Revenue estimating is the most challenging part of the budget,” he says, so spend a significant amount of time with the section heads or individual attorneys to get as good a guess as possible on what’s coming up.

Go through the current client list and ask the individual attorneys to estimate the income each matter will bring in. Recognize that new client matters can arise during the year, but don’t place big bets on that unless you have something to base it on. 

Ask what large cases they expect to work on, how long those cases will last, and whether they will involve trials or settlements.

Ask about possible revenue dips and whether any clients may leave during the year.

Look too at the number of billers who will be active; if some associates have left, the firm won’t have those billed hours coming in.

Rule #3: Save space for marketing

Don’t cut back on the marketing and business development no matter what the firm’s situation, warns Siciliano. That’s usually the first item firms cut, the argument being that marketing is an optional expense because the attorneys can keep turning out business without it.

“Well it isn’t an option,” Siciliano says. Marketing and business development are necessities for every business, as most law firms have recognized in recent years.

Rule #4: Expect things to change

Don’t think the budget is set in stone. “Manage in reality, not in yesterday’s hopes and expectations,” says Siciliano.

A budget is a living document. There’s no reason to hang on to one that’s already off by a mile. If four months into the year the firm realizes its projections are 20 percent off, revise the budget.

Review the budget every quarter to see if and where alterations need to be made.

Rule #5: Donʼt assume the money is there

The fifth rule is similar: don’t spend money without checking the budget first. If the firm wants to spend money that wasn’t budgeted, they should be willing to postpone spending something that was budgeted to preserve the planned bottom line.

For example, if the partners want to hire an associate and the budget doesn’t provide for the expense, the firm has to decide where that money will be taken from. The same is true if the expense of a new hire was originally covered but has since been taken out of the budget.

Ignore the budget “and there will be zero probability of meeting it,” warns Siciliano.

Rule #6: Check each month for variances

Produce a variance report at the end of each month.

Cover each of the line items and show what’s been budgeted, what was actually spent, and what the difference, or variance, is. Then find out why each variance has occurred.

If the firm budgeted $1,000 for travel and spent $2,000, the response needs to be “holy smokes! Why did we do that?” Go to the people who did the traveling and ask why they spent the money. Remember, this is not about finding fault or assigning blame; it’s about managing to the budget and learning to budget more accurately over time. 

Or if the budget carries a July revenue expectation of $50,000 from Attorney A and the actual revenue turns out to be $30,000, ask that attorney if a client has left or if a case is taking longer than expected.

Then decide what to do to get the numbers back on track. If it’s simply a matter of a fee coming in a month later than expected—a timing difference—that will take care of itself, Siciliano says. But if it’s a lost client, the firm may have to cut back on spending and increase the marketing until that loss is made up.

Decide, too, what to do to keep the variance from happening again. If a payment is coming in a month late, for example, find out what could prevent late payments in the future. Maybe the bills should be going out sooner, or maybe there are billing errors that need to be corrected.

Conclusion

“Budgeting,” says Siciliano, is “a constant learning process.” You create the document once, but you need to return to it and review it many times throughout the year to keep the firm financially sound.


Editor’s picks:

To see better profits, look harder at where money starts and ends


Keep profits on track with this quick 5-point spring financial checkup

7 steps you can take now to improve next year’s bottom line


Close

EMAIL ADDRESS


PASSWORD
EMAIL ADDRESS

FIRST NAME

LAST NAME

TITLE

COMPANY

CITY / STATE

Try Premium Membership

(-0)