I ADMIT IT. NO ONE LIKES A NAG. Whether it’s stopping smoking, exercising more, improving one’s diet or getting more sleep, anyone can easily recognize that these things would benefit his or her health tremendously. So, why don’t most of us just do them? The excuses are limitless: I’m too stressed to make a change right now; I don’t have time; the gym is too far away, doesn’t open early enough or closes too early; I don’t have time to cook healthy meals. Usually those excuses boil down to “I’d have to put forth a little effort and I just don’t want to. And I’m not going to unless someone or something makes me.” Then something or someone often does. Whether it’s just the knowledge that you’re going to have to increase your pants size if you want to be able to successfully close the zipper, a serious illness or the threat of a life partner leaving if things don’t change, something often comes around to wake us up.
The same could be said of law firm financial planning, especially budgeting. There are countless reasons why creating a budget for your solo or small firm practice, tracking your expenses and periodically checking in to make sure that you are remaining on target can really benefit your firm’s—and your own—financial performance. Because there’s no better time than the beginning of a new year to get in gear and start tracking your financial performance, why not put it at the top of your list for this New Year? So, if there’s often too much month at the end of your money, try these simple budgeting ideas.
START AT THE END
As strange as this may sound, the best starting place for any project—and especially for creating a budget—is to begin by first visualizing the end product you are trying to create. Tally up how much money you reasonably need to take home each month to cover your personal expenses. Once that’s set, review any historical data you have on firm expenses, creating a detailed list of the types of things on which you’ve spent money over the last few years, and how much.
If your practice is too new to have useful past financial information, make a detailed list of all of the expense categories you foresee and how much you think you’ll need to spend on each. (For help in ferreting out potential expense categories, take a look at the sample budgeting spreadsheet offered by practicePRO at avoidaclaim.com.)
Then jot down all of your fixed expenses, add in about 20 percent for things you haven’t thought of and variable expenses—those that increase as the amount of work you have to do increases—and calculate how much you are going to need to bring in each month to hit your income target. If that target doesn’t seem to be something you can attain, you may need to pare back your personal expenses, your office expenses or both as you finesse the numbers. Be prepared to spend some time on this exercise and take several shots at it, as you may not come out with a workable product the first time around.
Because not every expense you’ll encounter will be due monthly, there are a couple of ways you can handle those that aren’t. The “right” way is to use a spreadsheet to assign large one-time expenses to the months in which they fall, so that you can be sure to have the funds available to meet them. Another way, and one that’s often easier for solos and small firms, is to do “levelized billing” in much the same way as the utility companies do. Determine the total of your estimated yearly expenses, add your cushion for unexpected items and divide the total by 12 to get a monthly expense estimate. Then, for large infrequently paid items, such as your professional liability insurance premium or quarterly taxes, set aside one-twelfth each month—in an interest-bearing account if you can find one—so that you will have the money available when you need it.
MONITOR AS YOU GO
Shortly after the end of each month, create a report that shows your budgeted expenditures against your actual ones. If your actual expenses are below budget and you have paid yourself your set draw, you will, hopefully, have some extra money in your account. Let it accumulate until you have at least three months’ reserve on hand. This will come in extremely handy in case you have a very bad month or variable expenses increase unexpectedly quickly because of a surge in additional legal work. You can keep these funds in your regular account or move them to the interest-bearing account. Then, when you have accumulated an amount equal to your current monthly expenses plus a reserve of six months, consider paying yourself a bonus or investing the additional three months’ worth of funds in needed items such as new technology. If your actual expenses consistently exceed your budgeted ones, you will know sooner than later that you need to make some changes—and quickly!
REVISE AS NEEDED
At the beginning of each year, you’ll want to review your budget and make needed revisions to both your draw and estimated expenses, as indicated by your actual outlays from the year before. After several years, you will have accumulated enough data to be able to better anticipate both your income and expense ebbs and flows. And don’t forget that simple accounting or even checkbook software can be extremely helpful in gathering the necessary information and making the needed calculations to keep you always on track. All it takes is a commitment to enter your income and expense data on a regular basis.