President George W. Bush once famously said, “It’s clearly a budget. It’s got a lot of numbers in it.” For many of us, that sentiment aptly expresses a certain apprehension and even the disdain we feel towards the budgeting process. The term “budget” is commonly associated with the negative implication of limits and restrictions. However, we’d like you to think of an operating budget as a tool that can help you accomplish your goals. Like most tools, there’s a right way and a wrong way to use a budget. Over the years, we’ve assisted many law firms with their budgeting process. Here are a few helpful tips that we’ve shared with our clients:
Okay, maybe we can’t take credit for this one. But the sneaker company makes a good point. The single biggest budgeting mistake an organization can make is to not have a formal budget. And by formal we don’t just mean putting it in writing—although that is essential. A formal budget is not only a document; it’s part of a process. That process begins by defining the firm’s mission and goals. From there, you can design and implement an action plan which will culminate in a budget. The process continues perpetually as results are compared to the plan over time, and adjustments are made. You’ll need to ensure that your associates and staff have bought into the plan and are working towards the same goals. This requires their input up-front and regular feedback along the way. All the clichés about communication are true; so keep the information flowing in both directions.
The numbers in a budget symbolize the end results of the budgeting process. But many organizations (not just law firms) routinely begin with desired or mandated results and work backwards through their calculations. This means that the plan will be driven by the numbers, instead of the numbers being driven by the plan. As you proceed backwards through the process, the assumptions supporting the budget calculations and totals could become unrealistic. So start the process by utilizing assumptions that are consistent with your planned objectives and let the numbers flow naturally.
Getting the numbers right is only half the battle. Projecting the timing of receipts and disbursements is the other half. Cash flow in and out of a law firm can vary significantly from month to month. This is especially true for firms with significant contingent fee portfolios. You undoubtedly have a record of net fees that’s expressed in terms of dollars. But are you also tracking your fees in terms of time? You should be able to establish reasonable expectations regarding the life cycle for each type of case over time. On the expense side of things, we know that some operating expenses are fairly consistent in terms of amount and timing (office rent, for example), but others are not. Expenses such as expert fees and contract labor can be irregular and significant. Resist the urge to just evenly divide these types of costs over time, and carefully map them out.
Every computer programmer is familiar with the concept of “Garbage In/Garbage Out” (GIGO). That lesson also applies to the budgeting process. If the information input to the budgeting process is flawed, the final product will be flawed as well. Since your budget will be derived in part from your financial reports and accounting records, it is important that you account for expenditures consistently. Although this may seem like terribly obvious advice, it’s also easy to inadvertently muddy the bookkeeping waters. Are gas card and parking charges included in the vehicle expense total? Or perhaps the travel expense total? Or maybe they’re in the professional development expense total, since you typically incur these charges when you attend industry-specific conferences and the like. That’s just one simple example—this kind of confusion can result from all sorts of activity not being recorded consistently. The specific way you categorize and allocate the firm’s activity for bookkeeping purposes is not as important as doing it the same way every time.
Ringo Starr probably didn’t realize he was giving sound budgeting advice when he told the world “I get by with a little help from my friends.” You probably have an internal bookkeeper and/or an external accountant. Tap into their experience. If you utilize funding from a bank or specialty finance company, they should speak budget fluently. Let them help you interpret your mission and goals into a formal budget. Your clients come to you for sound legal advice and service. As a client of accounting, financial and other business-related services, you should feel comfortable enlisting the aid of those who are masters of their trade.