Just like your personal budget, it goes without saying that a law firm budget is only as good as it is realistic and achievable. With a contingent fee practice, however, it’s challenging to predict working capital needs when the timing of your fees and expenses is so uncertain.
So, how do you adhere to a budget as a firm with a contingent fee practice?
The simple answer: get creative.
Many businesses, and households for that matter, operate on a “cash basis” with the assumption that cash in the bank means they have money to spend. Most don’t realize that some expenses are ongoing and need to be paid on a regular basis; i.e. rent, insurance, car payments, payroll and payroll taxes for businesses, etc.
Although there are many fixed expenses associated with a law firm, there are also variable costs that can be reduced or eliminated during times of limited cash availability. These include advertising, personal draws, computer costs, auto expense, entertainment, seminars, etc. While many of these expenses are needed to run the business, in a cash crunch, delaying or eliminating these payments can go a long way to managing cash until more income becomes available.
For instance, your budget this month assumes $250,000 in fees and $150,000 in expenses, resulting in a net profit of $100,000. However, $200,000 of the fees are derived from a case that is settled, but is being paid in 60 days. Your accountant comes running into your office telling you that the adjusted budget now reflects a net loss of $100,000 instead of a profit of $100,000 for the month.
Now what?
Here are some quick tips on how to keep up with your budget—even when unexpected costs and expenses arise.
- Decide what expenses can be paid later without incurring substantial interest or late fees.
By way of example, you have an expert invoice payable in 30 days. A simple phone call can request delay of the payment until the fee comes in. Or, your invoice from ABC Office Supply shows terms of “10% net 45.” Instead of paying the invoice immediately to get the 10% discount, extend the payment to term and pay it in 45 days, delaying the outlay of cash.
- Postpone those expenses that won’t result in chaos to your firm
Payment of payroll and payroll taxes is absolute: your employees must be paid as promised and non-payment of payroll taxes can lead to serious personal consequences. But partner draws should be reduced or delayed entirely if possible, to such time as the fee income is received.
Alternatively, assume you’ve budgeted $2,500 for travel. Since your travel costs will ultimately be reimbursed, perhaps the meeting can be done remotely via Skype or conference call instead, thereby eliminating that expense entirely.
What about your marketing and advertising? Can those costs be reduced by less ads for a few months without harming future revenues?
- Determine if some expenses can be put on a corporate credit card to give you extra time
Auto and truck expenses, including gas, tolls and other incidentals, all can be placed on a credit card—delaying payment without you having to incur interest or late fees (as long as the credit card is paid on time). Office supplies are additional purchases that can be made with a credit card to give you a little more time while you await distribution of fees from your cases.
The foregoing are mere examples of what you can do to stay on budget for the short-term.
But, what happens if you’ve done all you can to minimize your expenses until that large fee comes in, and it looks like the budget is still short? Or, what if you don’t want to minimize expenses at all because it’ll hurt your firm’s potential future income?
Maybe it is time to look at getting additional funding, such as a line of credit or non-recourse advance which is possible with respect to both unearned fees and settled cases awaiting payment Explore various financing options here.
These budgeting tips are meant as a resource and not as financial advice. Be sure to consult your accountant or other finance professional for guidance specific to you or your firm.
