Written by Robin Neill
More and more law firms are recognizing how important it is to manage themselves like a business to survive in today’s competitive market. Businesses operate with efficiency, strategic planning, and a keen eye on the bottom line — principles that law firms can adopt to enhance their operational effectiveness. By embracing business management practices such as budgeting, law firms can optimize their resources, streamline processes, and invest in technology to improve their service.
A budget provides a structured roadmap for financial stability, strategic decision-making, and sustainable growth. Creating a law firm budget requires careful planning, collaboration, and attention to detail. Here are seven steps that can help your law firm create an effective budget.
Budgeting shouldn’t be a last-minute task. Law firms should initiate the budgeting process well in advance, ideally in the third quarter. Starting early ensures firms have ample time to assess their current financial standing, analyze past spending patterns, and anticipate future costs.
A fundamental step in budgeting is examining the firm’s profit and loss (P&L) statement from previous years. By comparing actual expenditures with previous years’ data, law firms can identify trends and patterns.
Areas to focus on include salaries and rent, which tend to be the largest expenses in a law firm budget. Don’t forget to consider inflation.
Setting clear, measurable, and realistic goals is fundamental to the budgeting process — and those goals must align with the firm’s overall strategic objectives. Whether the aim is to sustain current levels of success or to expand to new locations or practices, having a well-defined vision guides the budgeting process effectively.
For instance, a law firm planning to increase its partner count from 10 to 20 in the next year needs to account for higher advertising costs, additional attorney salaries, and potential increases in professional dues and liability insurance.
Successful budgeting necessitates collaboration between key stakeholders. This includes financial experts, managing partners, human resources professionals, and accountants. Each participant brings a unique perspective to the table, ensuring that the budget addresses all aspects of the firm’s operations.
Regular consultations and brainstorming sessions with these stakeholders can provide invaluable insights and foster a culture of financial transparency within the firm.
While analyzing the P&L statement, law firms often overlook certain unexpected costs. Items such as professional liability insurance, litigation expenses, or regulatory compliance costs can fluctuate, impacting the budget unexpectedly. By accounting for these variables and having a contingency fund, firms can avoid financial strain when unforeseen expenses arise.
Recognizing that employees are a firm’s most valuable asset, law firms should offer a competitive salary and benefits such as health insurance, retirement plans, and professional development opportunities. A comprehensive benefits package can attract top talent and ensure staff retention and satisfaction. Additionally, employee well-being initiatives such as mental health support programs or flexible work arrangements can enhance productivity and foster a positive work environment.
Law firms must factor in the costs of these employee benefits while budgeting. Firms should also take into account salary increases, such as cost-of-living adjustments, to stay competitive in the market.
Law firms should invest in advanced legal software with accounting features to track expenditures efficiently. These legal technology tools provide detailed reports on profitability based on various parameters, such as attorney performance, case type, and office location. Implementing artificial intelligence-driven tools can deliver insights into future financial trends and assist firms in making proactive budgeting decisions.
Transforming a law firm into a business entity demands a proactive approach to budgeting. Law firms can use budgets to position themselves for sustainable growth, client satisfaction, and long-term success.
Centerbase has a robust suite of tools designed to optimize law firm financial performance. Get in touch for a free demo of our tools and learn how our software can improve your law firm’s profitability.
Written by Carol Patterson
For five quarters in a row, law firm profitability has fallen, according to the 2023 Report on the State of the Legal Market, a study conducted by the Thomson Reuters Institute and Georgetown. (Data are based on reported results from 170 US-based law firms, including 46 AmLaw 100 firms, 47 AmLaw 200 firms, and 77 midsize law firms.) Profits per equity partner are down for the first time since 2009. Client payments and realization rates are down too.
Demand has also dropped for everyone except midsize firms, where clients are flocking because they want quality legal services without the major firm price tag.
So, how can small and medium-sized law firms capitalize on this demand and optimize their profitability? That’s what we’ll cover in this article.
Law firms should focus on profitability for a number of reasons. First, being profitable ensures that the firm can sustain its operations and provide quality legal services to clients. Having a profit allows firms to comfortably cover their operating expenses, such as rent, salaries, technology, research materials, and marketing, and establish contingency funds and reserves for unexpected expenses or downturns in business, such as a global pandemic, potential lawsuit, or market uncertainties.
It’s also important for law firms to have sufficient funds to invest in resources and infrastructure to stay competitive and deliver efficient services. To stay ahead of the curve, firms should make investments in technology, legal research tools, document management systems, communication tools and client portals, matter management systems, and training. The more profitable a firm is, the better it can enhance its capabilities and client service through investments like these. And the more investments a firm makes, the better able it is to attract, engage, and retain attorneys and staff members — not to mention pay them competitively.
Finally, profitable law firms are positioned to pursue growth opportunities and expand their practice areas or geographic reach. They can invest in client and business development strategies that attract new clients and increase their market share.
The baseline profitability goal for a law firm is 50 percent. If your firm isn’t hitting that mark, it may be because your expenses are too high or you aren’t earning enough revenue. Or maybe you are too heavily staffed, which can drain your law firm’s financial resources. The key is to figure out what is causing the problem.
Many firms look at their profit and loss statements, but these statements don’t tell you the whole story. The typical law firm P&L report isn’t granular enough to help you determine the true source of revenue and expenses. You may have a timekeeper who brings in a lot of revenue but not enough to cover their incredibly high expenses, for example. Or you may have a million-dollar client, but what you shell out to keep that client and maintain their business is so high that you’re essentially paying the client to remain on your roster. But you likely can’t tell that from your current financials.
The problem stems from too many law firms not running their firms like a business. Law firms that lack accountants don’t fully understand the concepts of what makes firms profitable. If your firm’s office manager or paralegals are managing your accounting, they are certainly capable of handling billing, checks, and cash receipts, but they won’t be able to focus on your law firm’s bigger financial picture.
The bottom line is that if you’re focusing just on revenue and expenses, you’re missing important details. Many law firms overreact when expenses look high and look for ways to make cuts. But if you’re focused on reducing spending, you’re also contracting your business, and the revenue will follow, as will employee morale and output.
And if you aren’t yet using law firm accounting software, you’re just planning your law firm’s future based on guesswork. That wouldn’t pass muster for your clients, and it shouldn’t pass muster for your shareholders, either.
The key is to study profitability by timekeeper. This way, you can discern which attorneys are in the clear and which need help. To get the full picture of expenses and profits for every timekeeper, you need to monitor direct expenses, indirect expenses, plus overhead. But most law firm billing platforms can’t deliver this information without running reports from hundreds of general ledger accounts.
Centerbase is here to fill the gap. Our new Profitability Reporting tool delivers the data that your partners need to drive smarter business decisions. Our tool goes beyond showing more than just data on what’s been billed and collected. Our platform helps you track revenue, expenses, and profit margins at the firm, practice group, and individual levels, so you can optimize your firm’s profitability and improve its financial performance. You can also analyze key metrics such as billable hours and realization rates so you can set profitable billing rates and pricing and create accurate budgets. With our platform, you can determine which timekeepers are most valuable to your firm, what practice areas to expand, and which matters are contributing to — and hurting — your bottom line.
Centerbase puts real-time accounting tools in the hands of everyone in your law firm. It’s like having your own personal accountant on call. Contact us for a free demo and learn how our profitability reporting can help you kick-start your law firm’s growth.