So you want to build your law practice with a line of credit, but how do you budget for it?
Follow these 3 simple steps.
- Specify how you’ll use the funding
Before you can budget for a line of credit, you first need to think about how you’re going to use the funds.
- Is your firm growing and you need to add staff?
- Do you want to expand your business by increasing your marketing and advertising?
- Do you want to enter into the mass torts arena and need funding to invest in acquiring cases?
- Do you need access to capital to fund case expenses?
- Do you need a line of credit to help manage the ebbs and flows of associated with running a contingent fee practice?
Once you determine what your firm needs are, you can start assessing how much it will cost to meet those needs, which will directly impact the amount of funding you want to request.
- Calculate your current income and expenses
Many law firms look at the cash balance in their bank accounts and from that assume they’re either making or losing money. But, that’s not a good measurement of success or failure, nor is it a good way to budget.
You need to know how much it actually costs to run your practice.
How do you this?
One of the best ways is to put together your budget by month. With the help of your bookkeeper or controller, calculate the monthly “fixed” costs—rent, payroll, insurance, office leases, utilities, etc. Then determine your “variable” costs, such as office supplies, advertising, auto and travel expenses, just to name a few. You may be surprised at the costs you’re incurring on a monthly basis when you put them down on paper.
When that is complete, be sure to consider any “extra” costs that may occur on a quarterly, semi-annually or yearly basis, such as liability insurance, bonuses, income taxes, accounting fees, property and other miscellaneous taxes, annual bar dues and CLE costs.
- Ascertain how much funding you’ll need
Once you have determined your annual budget through a month-by-month analysis, you can then go back and see where you’ll need to increase your costs in order to meet the needs that you specified in Step 1:
- Do you want to increase your staff?
Depending on the level of staff, include that figure into your salaries, benefits and related tax calculation.
- Are you looking to expand your business and increase advertising?
Calculate how much additional advertising will cost and include that in the annual budget.
- Do you wish to enter the mass torts arena?
How much are you willing to invest? $250k, $500k, $1.0mm? Add this figure into your budget.
- Have you taken on a large, complex case?
Anticipate your up-front costs—depositions, expert witnesses and medical reports are just a small fraction of the expenses you will incur during the litigation.
- Do peaks and valleys in the firm’s cash flow negatively affect the business?
Determine how much additional capital you need to smooth out the firm’s revenues and expenses.
This will give you a reasonable expectation of your “new” expenses and aid you in determining how much funding you’ll need to achieve all of your goals.
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.
If you had a crystal ball, you’d know exactly how much additional money you’d need to grow the firm of your dreams. Unfortunately, you don’t; no one does. And, since a budget is, in essence, a complete “guess-timate” of your revenues and expenses, it’s always best to remain conservative…go low on your anticipated fees and go high on your anticipated expenses.
Finally, remember you’ll eventually have to repay a line of credit, so make sure you’ll have the funds to do so. You can do this by choosing a lender that permits interest-only payments for a specified time, ties repayment obligations to when your cases settle, or who allows you to renew your line on a regular basis, which is a “win-win” for both you and the lending institution (i.e. they maintain a client and you maintain access to capital).