Note: If you have any account receivables past 90 days you should plan to read this article twice!

We all know that law firms that operate with a proper budget earn more money, more consistently and with less stress for their owners than those that do not have a budget and/or fail to use it properly. And contrary to popular belief, as a lawyer, you have all of the most important skills you need to effectively manage a budget for your law firm.

Don’t believe me? Well, think about the last time a client came to you with a problem they needed your help to solve. Your likely first step was to use your analytic skills to gather-up as much information as you could to piece-together a picture that makes sense, right? Then you probably used a little bit of imagination and developed a preliminary theory of the case which you used as a roadmap for your discovery plan, or to plan the transaction, or whatever next steps are appropriate for your particular practice area. Am I in the ballpark here? And at each stage during discovery or during negotiations, you likely reviewed your original theory and may have made modifications that the facts dictated.

Well, if you can implement the steps described above, and I know you can, then you have all the skills needed to manage your budget. In fact, once a lawyer learns a few basic vocabulary works and can translate “Accountingese” into plain English, I find that our natural analytic ability makes us even better at budget management than most accountants!

Vocabulary Words – or Translating Accountingese into Plain English

Chart of Accounts. I explained that a chart of accounts is nothing more than a list of expenses, by category. I may have neglected to mention that a chart of accounts also lists sources of revenue by category. It is traditional, though not necessary to list all categories of expenses first. The only plausible explanation I have ever discovered for this is that people generally like to hear bad news first. Remember, how you organize your chart of accounts should be governed by what makes sense to YOU.

Budget. A budget is nothing more than a list of your categories of expenses and revenues (your chart of accounts) repeated twelve times. Basically, the process of producing a budget is to list your chart of accounts and then make your best educated guess as to how much to allocate to each category for each month of the year. As you develop the practice of doing this each year, your guesses should become more accurate.

Budget Variance Report. This is a comparison of your best guess of how much you expected to spend/earn in each category each month and how much you really ended up spending/earning that month. It should contain columns for the amount you budgeted, the amount you actually spent, the percentage difference and a reason or explanation for the difference. I personally find it helpful to format a budget variance report as follows with a narrative explanation to accompany each category:

Category: Widgets

Budgeted: $100

Actual: $200

Variance: (100%)

A law firm’s budget should include a revenue budget, expense budget, cash flow budget (where you actually map out month-by-month when all expenses will be due during the coming year), and a capital needs budget (this is where you list what new items you may need in the coming year such as space, furniture, fixtures, equipment, software, etc.). A capital needs budget, in draft form, helps you to determine what items should be leased or purchased.

Don’t worry if you don’t have the technical training to physically do these things. That’s why you pay a bookkeeper or an accountant. Your job is to instruct your accountant to prepare these tools for you, and then to review them to make sure you understand what the evidence is trying to tell you. And as usual, if you need more help, or have any questions, we’re there for you with in-depth articles, recommended resources and you can send us e-mails from the website at www.howtomakeitrain.com.

QUOTE OF THE WEEK

“A buck in the hand is worth two on the books.”
-David Farber

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