Finance Corner: A Guide for Plaintiffs' Attorneys and their Clients 

A Collaborative Educational Blog Series  

 

 

LAW FIRM FINANCING

Managing Operations & Cash Flow: Blog Post #6

Budgeting: an essential component to conquering your firm's needs

BudgetingYou have big plans to grow your law practice. To do so, you’ll need to secure the necessary resources. Your plans should also include how to deploy the funding to start the process.

Take these 3 steps to jump-start your efforts:

  1. Outline you’ll use the funding

Having a solid plan on how you’ll use your line of credit is imperative to creating an effective budget.

Are you experiencing rapid growth and need to add staff to your office?

Are you looking to gain clients through the use of advertising?

Do you want to add a mass tort component to your practice and need funding to invest in acquiring cases?

Do you need access to capital to fund case expenses?

Will you focus on smoothing out the peaks and valleys that come with running a contingent fee practice?

Once you’ve planned out exactly what you want to accomplish, it will be more apparent how much capital you’ll need in order to reach your goals, therefore indicating how much funding you need to secure.

  1. Map out your current income and expenses

You bank statement isn’t always the best measurement of the financial health of your firm. As such, it shouldn’t necessarily be the driving force behind your budget.

You’ll need a clear picture of how much it actually costs to run your law firm.

So how can you do it?

To keep things streamlined, try to chart out your budget by month. This would include your “fixed” costs—rent, insurance, payroll, utilities, etc.—and costs that fluctuate each month. These may include supplies, advertising, travel expenses and many others.

Many times, you may blissfully unaware of your real monthly burn until you put them all down on paper. This can give you a good bird’s eye view of where things stand.

Don’t forget to include other costs that may come up quarterly, semi-annually or on a once-a-year basis, like liability insurance, bonuses, income taxes, accounting fees, property and other miscellaneous taxes, annual bar dues and CLE costs.

  1. Determine how much you actually need

After putting to paper your monthly expenses, you can then go back through and determine where you need to infuse additional capital in order to meet the goals that you set in step 1.

By having a realistic view of your costs, you can set expectations around what the “new” needs of the firm will be. You can then seek out the appropriate amount of funding to match those needs.

For example, if your future projections show you need $2.5 million, but your cases will resolve at varying times, then you’ll want a revolving line of credit. With a revolving line of credit, you can borrow to cover the monthly fluctuations of your budget and then you’re only charged interest on the amount you actually borrow. That being said, just like a bank loan or any other type of financing you choose, you’ll need to make sure to go back to your budget and include any such interest or financing charge in your calculations.

Since budgeting is based on estimates, it’s always best to be conservative in your projections. Don’t overstate your expected fees and always assume your expenses will be higher than you think. This way, you don’t set yourself up for obstacles before you even begin.

Be sure to also look long-term—you’ll need to repay a line of credit at some point in time, so make certain you’ll have the funds to do just that. Some lenders permit interest-only payments for a specified time, may tie repayment obligations to when your cases settle, or allow you to renew your line on a regular basis, which can help ease the transition into taking on financing.

Categories: Managing Operations & Cash Flow

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