Budgeting is one of the primary tools available to help manage your money – whether in your personal life or your law firm. The dreaded “B” word is feared by many as it is often associated with restrictions, headache and a sense of foreboding. However, a good budget can help you take control of your finances, plan your future strategy and grow your firm with confidence. Whether you’re starting a new firm or keeping your mature practice afloat, below are some of the basics to get you started.
If you want to take a drive from Johannesburg to Cape Town, some amount of planning is required that considers the available routes, number of passengers, tolls to pay, fuel stations, amount of luggage etc. Without a clear view on all the parameters, it is impossible to make the best planning decisions. Conversely, once you have a clear plan in place, there is less anxiety and off-the-cuff decision making during the trip, with more time to relax and enjoy the journey.
Similarly, budgeting allows you to systematically map out all the considerations, prioritise goals, identify issues in your firm before they become emergencies, create a clear plan and then follow that plan through to success.
The first thing to track is money coming into the firm. Most attorneys will have a gut feeling for this number on a monthly basis, however this is often overstated for several reasons:
- There is often a delay in collecting invoiced fees due to payment arrangements or slow paying customers.
- Some invoices are never paid and a realistic expectation of debtor write-offs should be incorporated.
- Law firms often experience seasonal cashflows and adjustments should be made for slower business periods such as court recess.
Be sure to include all of the various income sources you might have such as hourly earnings, flat fees, consultation fees, referral fees etc. However, the golden rule is to be realistic and if in doubt, err on the side of caution. You don’t want to be caught out expecting income which never materialises.
When considering expenses, it is helpful to distinguish between fixed overheads and variable costs. Overheads, or fixed costs, include the typical business costs that recur monthly such as salaries, office rental and software licenses. As a business owner, you expect to earn a salary so don’t forget to make provision for your own earnings in the budget.
Variable costs scale up or down and it is important to make room for costs that can arise unexpectedly. In your law practice, this may include travel and accommodation, transportation, office supplies, marketing costs and bonuses. It’s smart to include anything you want or need to buy for your law firm in your budget.
Remember to be intentional and include all expense lines. For example, if you are expecting to pay December bonuses then include these so that you aren’t scrambling for cash before the holiday season. A helpful way to make sure there are no blind spots is by looking back through your previous accounting expenses.
Ultimately you will be interested to understand the monthly and annual profits. Remember that it’s the after-tax profit numbers which are most important, so don’t forget to deduct contributions to SARS.
A well-constructed budget will allow you to go back and make adjustments or to simulate ‘what if’ scenarios to tweak and refine your planning.
While it is human to rush this process in order to view the finalized budget, it’s worthwhile noting that there is value in the budgeting process itself. Budgeting allows one to objectively reflect on the business and step back from the day-to-day distractions of operating a law firm.
It is also helpful to consult an accountant, advisor or mentor and talk through the budget. This can help to gain additional perspectives on what is and isn’t working as well as identifying opportunities for greater efficiencies.
Disclaimer: This article is for educational purposes only and should not be misconstrued as financial or tax advice. Consult an accountant or registered tax practitioner for advice specific to your financial situation.