How Do I Create a Budget for My Law Firm?

Most of us understand, instinctually, the value of a budget. We get the idea that it helps to know where your money goes, how much you can spend in different parts of your business, how much you have left over, and more.

But we also know that, on the day-to-day, you don’t usually make decisions based on your budget. You use your gut, or you spend where you need to spend. Sometimes your bookkeeper prepares a budget for you, which often seems like enough. Other times, you may draft a budget, but your finances fluctuate often and, on a weekly basis, you probably never look at it.

What if you created a budget you could actually use?

Traditional Budgets vs. Profit Plans

Now, at CathCap, we don’t even believe in traditional budgets. Budgets are about determining where to spend money, and how to do so using the finances that you had in the past. It’s not actionable, and it doesn’t really tell a story.

What we believe in creating is a “Profit Plan.” It’s still like a budget, but it’s a plan of action that you are using to create the desired profit. Keep that in mind as you start to create your budget, as it can affect some of your decisions and your mindset when looking at your budget.

Do You Have a Budget and Is Your Budget Good Enough?

There are different ways to create budgets. Some attorneys just try to use the fastest, simplest method they can. For example:

• Your bookkeeper can make one and send it to you using the “Budget Wizard” of Quickbooks. It uses last year’s revenue and basically keeps the numbers the same.

• Your accountant can make one for you. It’s similar to the Budget Wizard version, but it looks and trends, so, for example, if it expects you to make 3% more than everything is adjusted by 3%.

That’s what some attorneys do, but if you’re like our clients, we assume you’re not satisfied with the status quo. That’s why we recommend doing it the way we do it.

We were working with a client named John and talked to him about his dreams for the year. He had wanted to add TV to his marketing budget. When he added that expense to the budget created by his bookkeeper, it showed a massive loss. He was bummed.

But it didn’t work was because he had created a budget based on his revenue. He did not create a budget designed to increase profits. So we went back with him through his budget, talked about how many new clients that TV ads would bring in, looked at the cost of staff that we may need to handle the work, looked at onboarding costs, and more.

Once we did all that math, we found that not only was he not losing money on TV ads – he was about to make a LOT of it. Turning his budget into a profit plan document that was designed to make his company money ended up helping guide his investments and making him far more money.

How to Create a Profit Plan

Creating a profit plan starts with determining a justifiably assumed revenue. It can be revenue based on current capacity, or a projected revenue based on marketing.

Data is everything. If you want to do it based on marketing, you will need to know things like the profit statistics for your cases, workload calculations, how many net new cases you can bring in each month, the value of a case, and so on. It’s a bit more work, but it is worth it.

Program out your revenue based on that. With our CFO services, we actually like to do both models and compare. If they’re close, you’re on the right track. If your capacity numbers are significantly lower than your revenue numbers, you have to take a look at both your staffing and your marketing assumptions. It doesn’t mean that it’s wrong, but you have to see if you’re going to need to hire someone, adjust marketing expectations, etc.

Don’t forget that if you only collect 60% of what you bill, you’ll need to adjust for that as well.

Once you’ve determined that number, you’re going to enter in expenses. We’re going to pull in numbers from your Profit and Loss from the year, write down recurring expenses, taxes, your salary, and anything else that occurs monthly or during the year (don’t forget to include annual bar dues, year-end bonuses, insurance, and more).

Now comes the fun part: The Dreaming.

• What changes or investments do you want to make?

• Are you going to hire?

• Are you going to move to a new location?

• Are you going to invest in some new online marketing?

After you’ve answered these questions, you can then look at your bottom line. Are you making enough money? You can spend less, cut what’s necessary, make more.

Are there ways to INCREASE revenue? Maybe you can look at places you can spend more money to make that happen. Add in money there and project out how much that will bring you (after adjusting for staffing costs). What do you need to adjust to get the profit where you want it to be?

Remember, this is a Profit Plan. It’s not just a budget. You’re looking at this document from a profit-first mindset and figuring out the numbers you can bring and how to bring them in order to take home the profit you want.

It’s a bit more work, but it’s worth it. For more information on how you can use your financial statements to run a more profitable law firm, click the link below to sign up for our free resources.