Professional Services Accounting ARTICLE -
Start Budget Planning Now To Improve Profitability And Motivate Lawyers and Staff

Target Audience: Law Firm Professionals, Lawyers, Law Firm Associates, Strategic Planners

An annual budget of both revenues and expenses is the linchpin of management for almost every type of organization. It enables managing partners and management committees to plan their activities, set goals and measure actual performance. Without a developed budget, you’re just wondering how your practice will function and what you’ll earn.

If you are in solo practice, a budget helps you set your income requirement — what you’ll need to satisfy personal goals. Only then can you determine how to meet the requirement. In that way, your expected or desired pay should be a line item expense — a target from which you may end up in a sur­plus (bonus) or deficit (lowered pay).

Larger law practices function the same way, and the budget becomes even more important as the partnership or group size increases. Surprisingly, even midsized groups often have an ineffective budget process, with resulting financial uncertainty. Reviewing the basics of budgeting can help make it work.

Basic Steps

1. Draft it. Collect the accumulated data, mostly from the present year’s operations, and project the figures to next year. Start before the new year begins, if possible, but starting in January or February is better than not doing a budget at all. Be conservative, but make realistic assumptions of next year’s perperson activity (production), reimburse­ment levels and support requirements. Create the budget on a computer spreadsheet program so you can easily change your assump­tions and run the numbers anew. If your time and resources are thin, we can help you get started and take you through the nec­essary steps.
2. Analyze it. Evaluate this first draft line-by-line. Do the assumptions lead to the partners’ desired incomes? Confer with part­ners, managers and key employees to assure each item’s feasibility. Remember that a budget serves as a consensus-builder. It helps all players accept agreed targets and thus work together to achieve them.
3. Edit it. A good budget should go through several electronic drafts as you review each item, discuss, reevaluate and study its effect on the whole budget. That’s why you’ll want to start the process early and computerize as much as possible.
4. In the review process, take a “what if” approach. Budget forecasts will not always be accurate — especially concerning produc­tion and payment levels. So do some contin­gency planning to decide what to change if an impor­tant item veers way off budget.
5. Adopt it. All partners should meet and approve the final budget. At this time, explain the revenue implications for each partner. To determine each lawyer’s capacity basis, calculate the anticipated number of billing hours and multiply it by his or her hourly rate. Don’t forget to multiply each lawyer’s capacity by an appropriate realiza­tion rate — using a range between 80% and 95%. Other­wise your budget may not realis­tically portray projected revenue. Make sure you gain each partner’s approval because it demonstrates his or her commitment to the budget’s income and expense levels. And it’s your managing partner’s mandate as to the line items he or she can control and influ­ence. The more strongly the budget is approved and accepted, the more likely it is to be achieved.
6. Monitor it. Use the budget throughout the year to monitor performance. Set up a monthly or quarterly report so you can com­pare actual figures — line by line — against budgeted figures.
7. Control any variances’ impact on the entire year’s results. If, for instance, a lawyer’s production is below budget, consider reduc­ing his or her pay promptly to avoid a year-end overdraw. If expenditures exceed budg­eted amounts, be prepared to turn off the spigot mid-year — don’t wait until year end. If volume and revenues are above or below expectations, consider hiring or trimming staff. Use the actual-to-budget comparisons to reward good performance and address poor results. You can motivate employees by periodically comparing their performance to the budget.
8. Expand it. Extend your budgeting process to the two years beyond the upcoming year. This forces management to come up with some rough assumptions for planning pur­poses. It becomes a base for long-range plans, marketing strategy and partners’ retreat agendas, among other things. You’ll find your ability to project the future improves each time you go through the process.

Planning Leads To Change

While budget planning is time consuming and arduous, its short-term and long-term benefits are invaluable to law firms. Remem­ber, a budget is useful only when integrated into your daily work. So taking some time each month to evaluate budget results inevi­tably saves time and money. Call your finan­cial advisor to see what budget-planning steps you can take immediately.

Find out how our expertise in professional services accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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