Opening and managing a law firm is an exciting venture that also comes with significant financial considerations. Most legal professionals do not have previous experience or knowledge about running a business. Even if you are an experienced business owner, it is always a good idea to review your budget on a regular basis. Creating and maintaining a SMART budget is crucial and will increase your potential to become profitable more quickly. This guide will walk you through key steps in crafting a SMART budget that maximizes your chance for financial success in the early stages of opening a practice and beyond.
Profitability boils down to increasing income and decreasing expenses. Law firms make a profit when they take in more than they spend. Unfortunately, this is not as simple as it sounds. The tips below will help you determine how best to increase your firm’s profitability:
- Understand Your Start-Up Costs. Before you can create a SMART budget, you need a clear picture of the start-up costs involved in opening a law firm. These expenses vary based on factors such as location, firm size, and practice areas. Common start-up costs include:
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- Entity formation fees
- Bar dues
- Malpractice insurance coverage
- Office space
- Business insurance
- Hardware
- Software
- Legal research
- Furniture
- Marketing
- Set SMART goals. Increasing profitability requires setting strategic goals that are specific, measurable, achievable, relevant, and time-bound. See this article for more information about setting and measuring SMART goals for your firm.
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- Specific. A specific goal is actionable. So rather than “become a better business owner”, an example of a specific goal would be “increase collection rates.”
- Measurable. You must be able to track the goal’s progress. If you want to increase collection rates, make it measurable by putting a number on the rate, such as increasing by 5%.
- Achievable. A goal is not helpful if it is not achievable. Step back and determine what goals make the most sense in terms of balancing achievability with your current workload.
- Relevant. The goal must be relevant to the firm’s overall vision. Be sure it aligns with your other goals and is worthwhile.
- Time-bound. The goal also needs a target date of completion. This helps to keep you on track towards completion of the goal and prevent everyday tasks from taking priority.
- Project Revenue Realistically. One of the next steps is forecasting realistic revenue projections. This can be difficult, especially early on, because most firms are unsure of when or how much revenue they will receive at any given time. To project revenue more accurately, consider the following:
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- Number of clients. How many clients do you reasonably expect to represent every month? Consider referrals, networking, and marketing efforts.
- Billable hours. Estimate the number of hours you will be able to bill each week and multiply this by your hourly rate. Be conservative with this calculation. Administrative and non-billable hours can be time-consuming, especially in the beginning.
- Flat fee services. If you offer services on a flat fee basis, calculate how many of these cases you can realistically take on each month.
- Client payment. Depending on the client and the types of services being provided, some clients will not pay immediately. Factor in possible delays of 30-90 days for receiving payments on invoices.
- Make informed decisions regarding expenses. Some expenses are mandatory and fixed, such as bar dues and PLF assessments. With others, you may have the flexibility to determine whether the expense is necessary and the time to evaluate which options make the most sense financially. Do your due diligence when considering purchases. Make a detailed list of your firm’s needs, like office space, furniture, or technology. Then research several options before making a final decision. It can be tempting to make quick choices, but taking the time to truly understand what works best for your firm will help increase profitability in the long run. For example, if you use a practice management software program, optimize your tech stack by understanding its features so you don’t end up paying for other unnecessary programs.
- Automate when it makes sense. Using technology to automate certain tasks is essential. For example, automate repetitive and non-billable tasks like client intake and billing as much as possible. List the tasks that should be automated and who will do them. Then create a plan to sustain that process moving forward. Spending too much time on non-billable tasks is not a profitable use of your time.
- Understand your clients’ payment preferences. Make it easier for your clients to pay their bill. Most clients now prefer to use a credit or debit card. You can find many payment processing programs that allow you to send invoices and a payment link to clients via email.
- Track key metrics. You need to track certain information to determine ways to increase profitability. It can be helpful to measure things like your utilization rate (number of billable hours divided by number of hours in the workday), realization rate (number of billable hours invoiced divided by number of billable hours worked), and your collection rate (number of hours collected divided by number of hours invoiced). Also consider tracking your profit margin, determined by dividing net income by revenue. A larger profit margin signifies greater profitability. This can also be done on a per-matter basis, allowing you to identify which areas of practice or matter types yield the most revenue.
- Review regularly. Don’t think of your budget as stationary. Regularly review your budget to measure progress and find potential ways to increase profitability. Over time, you may change your goals and need to develop new strategies to achieve those new objectives.
In today’s legal landscape, improving law firm profitability requires a balance between tradition and innovation. The most successful firms combine digital solutions with data-driven decision-making. The key to sustainable profitability lies in viewing your firm as both a legal practice and a business enterprise. Develop clear metrics for success, implement efficient billing practices, foster a culture of accountability, and be open to change. And please do not hesitate to reach out to a Practice Management Attorney for assistance. We are here to help!