Financial security is no longer a guarantee for established law partners at powerful firms, let alone lawyers with brand new practices. Thanks to a variety of increasingly common factors, including legal software and lingering effects of the economic recession, lack of financial stability is now an industry-wide problem. In fact, one hypothesis suggests that out of the 150 to 250 American firms that are historically profitable and cater to large corporations, only 20 to 25 will survive the next decade.
To minimize expenses and maximize profits, you must use your time, staff, and resources as efficiently as possible. Secure your firm’s future by practicing some of these strategies to make smart financial decisions.
Financing a Law Firm
Financial security starts with the basics. What is the source of your financial capital, and where will you get money if your firm experiences occasional slow periods? To finance a law practice in today’s economic climate, it’s important to anticipate risks and keep close tabs on your revenue stream.
Considering Your Capital Options
Whether you’re opening a new practice or trying to maintain your firm’s success, you need some financial capital. Each of the following sources of capital present unique benefits and risks:
- Personal Savings—When you invest in yourself, you need to stick to essential purchases and maintain a safety net that will support you in tough times.
- Personal Loans—You may incentivize your friends and family members by agreeing to interest rates that exceed their current savings account gains.
- Bank Loans—Interest rates are cheaper than credit cards, but bank loans require much, much more information about your current and future financial outlook.
- Personal Credit Cards—You may receive additional benefits from a credit card company, but if you spend more than you earn, high rates must be managed by moving your unpaid balances to new cards with low introductory rates.
- SBA Loans—Commercial banks provide loans through the Small Business Administration (SBA), which offers special incentives for certain demographics and communities. However, both parties have their own sets of requirements, so it’s twice as difficult as applying for a personal loan.
- Business Resource Centers—Also known as local business incubators, these centers provide a physical space and essential equipment to help new graduates launch practices in your area.
Minimizing Your Up-Front Costs
The items that make up your office are long-term investments in your productivity and professional reputation. Some up-front essentials can be avoided if you lease a furnished suite, but you may also reuse personal possessions or take advantage of low prices from second-hand and wholesale retailers. Start with the bare minimum:
- Desk and Chairs—Provide ample space to work, as well as comfortable seating for yourself and at least two clients.
- Laptop—It tends to be more versatile than desktop computers.
- Smartphone—Mobile devices are practically mandatory.
- Printing Equipment—Secure a scanner, copier, and/or printer (or at least access to these services).
- Accounting System—You’ll need this especially if you plan to handle trusts and estates.
Account for Recurring Costs
Rent and utilities aren’t the only expenses that will result in monthly bills. Remember to leave room in your budget for the following monthly and recurring costs:
- Living Expenses—Set aside at least one year of personal living expenses before starting your practice.
- Research Services—If your bar doesn’t offers free research services, you must cover the costs yourself.
- Monthly Connection Fees—Find out if your jurisdiction requires electronic filing; it may involve monthly connection fees and per-page fees.
- Backup Services—All your electronic data should be backed up to a secure, off-site storage facility.
- Professional Liability Insurance—It’s extremely important to secure protection from possible lawsuits and liability claims.
- Marketing Efforts—Spreading the word is even more important when your budget is tight.
Managing Your Cash Flow & Credit
You and your clients will depend on your ability to manage your cash flow and lines of credit wisely. Be aware of every dime that enters or exits your firm, and take steps to protect yourself from future losses.
Setting a Smart Monthly Budget
Consistent, accurate bookkeeping is key to ensuring your firm’s financial stability. It’s important to find your break-even point and set your expense budget accordingly. Unless you know how much money you need to make each month, you may fall short and accumulate debt.
Avoiding High-Stakes Credit Lines
Company credit cards come with perks and protections that loans and lines of credit don’t. However, their interest rates may increase after a certain introductory period, and they may also include fees and requirements that aren’t immediately obvious.
Paying Taxes and Managing Income
Taxes and unexpected expenses will only be devastating if you’re not already prepared for them. Practice the following strategies to satisfy your tax requirements and maximize your revenue stream:
Withholding Your Taxes
Unless you use a payroll service, you are responsible for estimating, withholding, and paying your income and small business taxes. Set aside money for this purpose if possible. If you withhold a third of your income in a separate account, you won’t face any unpleasant surprises or a penalty for paying a lump sum later.
Deducting Business Expenses
Remember to deduct business expenses whenever possible. Keep track of new equipment you purchase, make big purchases before the end of the calendar year if possible, and keep your receipts for every purchase.
Saving Up for the Future
Set aside extra paychecks whenever possible, rather than spending more money during more profitable months. This will give you the psychological bonus of a safety net, and it allows you to upgrade equipment to prevent repair costs and productivity loss.
Forecasting Income and Balance Sheets
As you look to the future, it’s important to track the profitability of your clients and accurately assess your own profit margins.
Understanding Your Monthly Income
Review your balance sheets very carefully, so that you can become aware of trends and notice any changes or discrepancies as soon as they occur.
Accounting for Contingent Fees
If you won’t get paid unless or until another party fulfills their settlement requirements, you may have to wait months to receive compensation for your services. Remember to make budget forecasts that reflect this.
Avoiding Common Financial Pitfalls
No lawyer wants to learn financial lessons the hard way, but small and struggling law practices are especially vulnerable to the consequences of poor financial decisions. The following mistakes are common but costly. Fortunately, they’re also preventable.
- Not Billing for All Your Time—If you don’t record all billable time at a rate that reflects your experience, you’re giving away your services for free. Keep track of every call you take, write down your tasks as you complete them, and don’t slash rates for loyal clients or less productive sessions. Discounts that encourage immediate payment can be valuable, especially if they only apply to payments made within the first 10 to 30 days.
- Not Going Paperless—Paper, ink, and printing equipment aren’t the only costs associated with hard copies. If you fail to switch to a paperless office, filing cabinets will take up valuable space, documents will get lost or take extra time to find, and energy and maintenance costs will increase.
- Scaling Back Your Support Staff—Use your support staff efficiently instead of limiting it to reduce overhead costs. Don’t waste your time completing tasks that support staff can do, and don’t ask your skilled and senior staff to complete tasks below their pay grade.
- Accepting Difficult Clients—Settling for uncooperative clients could slash your profits by half. You’ll have less time for clients who pay on time, cooperate, promote your firm by word of mouth, and cause you little stress.
- Keeping Your Mediocre Clients—Understand the hidden costs of mediocre legal clients, including loans, stress that leads to mistakes and malpractice claims, and loss of billable hours.
- Swallowing the Costs of Printing—Charge clients for the paper and ink you use to recoup your printing costs and minimize expenses.
- Failing to Control Your Time—Take control over your office hours by enforcing no-interruption hours and asking staff to brainstorm solutions before coming to you with problems. Chaotic office hours could eat up to 30% of your billable hours.
- Cutting Corners with IT Consultants & Products—From destructive viruses and data breaches to inexperienced IT consultants and inefficient computers, technology problems could cost up to $9,000 per year. Invest in newer operating systems, new and reliable hardware, onsite warranties, data backup services, and IT staff with legal experience.
Keep Your Law Firm Financially Secure
Don’t underestimate the psychological impact of financial setbacks. If you make an effort to avoid common mistakes, protect your firm from legal claims, and choose your clients and cases carefully, you will be able to focus on doing the best job you can. Peace of mind allows you to improve your skill set, identify red flags, and come up with more creative solutions to resolve your clients’ difficulties. It also gives you a competitive advantage as economic stakes continue to rise.