Do you ever wonder why your firm does not generate the profit it should? When attorneys are billing $300, $350 or more per hour how are you not profiting? The lateral recruiting division of Firm Transitions frequently hears from attorneys because they believe their salaries, bonuses or raises do not correlate with their billable hours and hourly rates. This belief results, in part, from a lack of understanding by many attorneys of their firm’s basic finances. All attorneys in the firm need a working knowledge of factors impacting the firm’s profitability. Accordingly, this is the first of two articles focusing on law firm finances. It addresses expenses.
Create a New Budget Annually
When creating a budget, a common mistake is to just take last year’s expenses and add 10 percent. Like the development of a true business plan, a budget takes time to create and requires the management team to have a firm understanding of what is currently being spent, what goals the firm has over the next year, and what should be spent to accomplish the goals. Break down your expenses into major categories then subcategories. An example of a major category would be marketing. Subcategories would include: print materials; direct mail; digital marketing and search engine optimization; ads in publications and other media outlets; seminars for the general public; and promotional products.
There are many blogs that break down various costs your firm might encounter. However, for purposes of this article, it seems best to create a sample budget (pictured right) for a small five-attorney firm that consists of two equity partners and three salaried attorneys with a 10-person support staff. This budget is designed to serve as an example for your firm as determines its budget for 2015. As you can see, personnel and office space account for a huge percentage of this firm’s budget. Accordingly, it is difficult to create a set percentage of the budget a firm should spend on each category. If this firm only had five support staff and 2,500 square feet of office space, its budget would change significantly with respect to those two categories. Computer/IT would change some but not as drastically, and it is very likely the firm would still invest the same amount in marketing. Each firm is unique and the culture and goals of the firm will drive the budget.
Review Expenses Regularly
Whether your firm is new or well established, it is best to review expenses in each category on a regular basis. Dig into each category and make necessary adjustments. Small law firms are likely to see large swings in some of their major categories. One example is computer/IT primarily because of the cost of hardware as new computers and other pieces of equipment are needed. One small firm, for example, had 17 computers that were over five years old and were desperately in need of being replaced when Microsoft discontinued support for Windows XP. Since the firm had not purchased more than one or two computers each year, needing to budget for 17 in a single year significantly altered its projected budget for 2014. With respect to marketing, a firm might need to reallocate funds if it wants to build a special app for clients or rebuild its website. A firm that has used its website as a landing page, but now wants to move up the rankings on search engines is going to need to shift funds to account for the monthly expenses associated with search engine optimization and/or pay-per-click campaigns.
If your firm does not have a true firm administrator and the managing attorneys have too much on their plate to create a real budget, you should consider hiring a consultant who is willing to learn about your firm and help determine if current expenses are in line with market rates and your goals or if your firm is wasting money on services or products that do not provide real value to the firm.
Next month, we focus on the revenue side of the budget and profitability.