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Many of us live our lives, and manage our law practices, as if every day will be the same as the last—into infinity. But nothing lasts forever. Turbulent financial times remind us, once again, that the only thing that’s constant is change. So to ease you into a financial frame of mind that will help you be prepared for change—which is sure to come to your practice, sooner or later—here’s some quick advice to incorporate into your planning.
Get in Better Shape
Physically, those who are in good shape are much better able to adapt to changes in the environment. Likewise, being in good financial condition can mean the difference between a firm breaking or enduring under market shifts.
In years past, the credo has been that debt is good. And if a little debt was a good thing, borrowing more—and more often—seemed even better. Debt is indeed a business tool that, just like many others, can help you grow a practice when used properly. It should not, however, be the norm to operate your practice at the full extent of your available credit line, day in and day out, year after year.
You should take advantage of any periods of relatively low interest rates to reduce or eliminate debt, freeing up cash flow and removing vulnerability to rate increases or conditions that may reduce or eliminate entire practice areas. What is good? Total debt-to-equity ratio should be 1:1.
By “flexible,” we mean that you shouldn’t let your firm get locked into anything too long-term or expensive. To be sure, sometimes a long-term deal can yield great rewards, such as when Southwest Airlines took lengthy contracts for jet fuel before the price of petroleum went through the roof. Overall, though, you should think carefully about 20-year leases, long-term borrowing arrangements and anything else that may lock you into a difficult position if conditions in your area change quickly and radically. Chances are good that’s just what will happen—and many law practices won’t notice in time. Often lawyers aren’t paying attention to the looming shifts in front of them; they are busy worrying about their clients’ problems instead.
We’re not talking about wearing fig leaves here, or failing to take credit for the big win. Instead, we mean that a law firm should operate well within its means. Case in point: Many believe that they need big, lavish offices to project the appearance of success and attract new clients. Of course, if the firm is wildly successful financially, then solid oak conference tables and Carrera marble washroom floors may be well within reach. A lot of firms, though, live to the very edge of their financial abilities—and especially in an economic downtown, that can become a cause of grief. A good analogy is the SUV driver who was cruising when gas was $2 per gallon and started crying loudly when it went to $4.
Think carefully about what you really can afford, and then spend less than that sum. Your overhead ratio (expenses to gross income before taxes) should be no more than 65 percent. If your expenses are higher than that, look at how to trim some of them.
Think Two (or More) Moves Ahead
Just like in chess, in any business it pays to think farther ahead than just your next move. For example, if the news in your community is that a new auto plant will be built, don’t think about that change in “standalone” terms—rather, think about all the cascading changes the new plant will bring, and how they could create new business for your firm. Maybe you’re not in a position to get the real estate work for the plant’s property acquisition, but how many new people will be moving to your community as a result of the plant’s construction and opening? What legal services do you supply that they might need? How will you get the word out to your new targets, and when should you build it into your budget? Most firms spend approximately 2.5 percent of their budget on marketing to develop new business.
Even a change that initially appears to be a disaster for your firm can actually be a source of new business and greater future earnings—if you’re in a position to take advantage of it.
David J. Bilinsky is a practice management consultant who focuses on enhancing law firm strategy, finance and technology initiatives, as well as Editor-in-Chief of Law Practice magazine. He blogs at ThoughtfulLaw.com.
Laura A. Calloway is Director of the Alabama State Bar’s Law Office Management Assistance Program.