4 Things I’ve Learned About Creating a Law Firm Budget

If you had asked me what it cost to start a law firm in 2012, I would’ve said this: $7,810. Reading over that figure now, it actually seems like a reasonable estimate of a law firm budget: Rent, bar dues, insurance, computer, software, internet access, and other prerequisites are all covered.

Boy, was I naive. You see, I took that idea and put it into practice in 2015. And honestly, I had mixed success. I had a few clients, I made okay money in my first year, and then I joined a firm that made, to estimate it roughly, about a hundred times the revenue my solo firm did. Their big secret, besides a strong reputation and oodles of experience, was this: They spent a lot of money to make a lot of money. Starting a firm on the cheap is all well and good, but making real money usually requires you to spend on the thing everyone always forgets: marketing.

One thing is for sure—no matter how much money you have to start with, you’ll need a law firm budget in order to help your business succeed.

First, let’s outline the general points of a law firm budget. Then we’ll talk marketing, and then we’ll wrap it up with a guesstimate of how much you’ll plan to spend.

Though this mostly applies to new firms that don’t have a revenue and expense history to work off of, if you’re looking to shake things up and grow your practice, look at the advice below and consider whether, maybe, you’ve just been doing it wrong.

1. Budget for the bar dues and insurance costs albatross

If you want to be a lawyer, you have to pay the lawyers. Between bar applications and the exam, the upfront cost is massive. Add on hundreds of dollars in annual dues, plus more for state and local bar organizations (which are very optional, but may yield benefits through networking), CLEs, and malpractice insurance. All up, the cost to simply call yourself “esquire” can start at four figures for one state only. Don’t even get me started on what it costs to be licensed in multiple states—Uniform Bar, my foot.

In terms of budgeting, most bar dues are annually—there is no payment plan to break the cost up monthly. Ditto for most CLE providers. I’ve also noticed that a number of malpractice carriers offer a discount to pay annually as well, which means all of these expenses may come in a single month. A credit card may soften the blow, but then you’re dealing with interest costs.

To avoid a big hit at the end of the year, simply divide the cost of all these expenses by 12, and put that amount aside each month.

Tip: Malpractice insurance rates can be greatly reduced by shopping around and checking with your local bar. Many offer discounted rates to new grads, since they don’t have a possibility of past claims, and tail coverage is therefore unnecessary.

2. Avoid avoidable expenses

I just threw away the laptop I used in law school last month. I graduated six years ago. The lesson there is not just that I’m a hoarder, but also that computer equipment doesn’t reach obsolescence as fast as it used to—a six-year-old PC can probably still run everyday law office software, like a browser and Microsoft Office.

Translation: Foregoing a new laptop in favor of a hardy old computer can be a boon for your law firm budget.

However, using older hardware comes with a few caveats: Make sure you have backups (the cloud is not the scary hackfest you think it is, especially if you use a notable provider like Google or Box.com). And if you are hard on your equipment, like my brother is (three laptops in three years of law school), maybe repurposing the old workhorse isn’t a great idea.

If you do need a new system, take time to seriously consider what specs you need. Law office work is not demanding in terms of hardware, and you can easily get by with a budget system. A more important consideration than processor specs or RAM capacity is actually physical size—a thin and light laptop or convertible two-in-one system is handy when you’re making house calls or dropping in at the local library to do research.

3. Work smarter, not cheaper: Tools to increase efficiency are worth the cost

How much is Clio per month? It depends on whether you’re on Starter, Boutique, or Elite, of course, but the bottom line is this: it’ll save you time and pay for itself after probably an hour. Yes, you can log calls, contacts, billable hours, expenses, and invoices in a dozen Microsoft Excel files, but the convenience of a software platform that runs on pretty much anything, and from anywhere, is already worth the expense. Add in the time saved with things like document generation and invoicing and it’s worth the monthly subscription cost.

Clio is one obvious example, but what other tools are worth the expense?

  • A cloud storage service, like Google Drive or Box.com is great for backup and for road warriors;
  • Quickbooks Online comes highly recommended for watching your cash flow, and they have a monthly subscription;
  • G Suite, formerly known as Google Apps, is Google’s personalized-to-your-business email, calendar, cloud storage, and everything else solution;
  • Office 365 is a G Suite alternative that comes with the time-honored Microsoft Office, in addition to a cloud storage drive, personalized email, and more.
  • A credit card payment processor (fees vary, many don’t have a monthly fee but do charge per transaction);
  • A good bank that doesn’t botch trust transactions or sneak in fees.

Most of these are monthly expenses that you’ll want to put in your law firm budget. When it comes to trimming a budget, I always have an urge to try to kill the ongoing subscriptions first. But before you do, ask yourself this: Does the product allow me to bill more hours? If so, it’s paying for itself.

4. Don’t leave out the forgotten, important, and expensive expense: marketing

Marketing is where the 2012 version of me was truly naive. I can create websites. I can pump out content.

But that isn’t enough. Online marketing isn’t just an if-you-build-it-they-will-come scenario. Unpaid marketing through a great website and strong content is a winning marketing strategy, but it’s also a long game, and most law firms can’t wait years to rank for common search queries on Google or Bing. Yes, it start with the website: All roads (third-party websites and marketing channels) lead to home, and a great website converts interest drummed up on third-party sites to calls and clients.

But in the short-term, you’ll probably need to do some advertising with third-party sites to get noticed.

However, most third-party sites aren’t free. A few that you’ll consider at some point include:

  • Avvo (Free, Pro, Premium Directory Listings and Banner Ads);
  • FindLaw Directory (Premium Directory Listings);
  • Google Adwords and Bing PPC (The average cost per click, not client, is over $5 and in some practice areas and larger metropolitan areas, can get into the hundreds of dollars);
  • Facebook Ads (Costs vary, as there are lots of different ads and ways to pay—per ad click, per video view, etc.—but it’s generally cheaper than Adwords);
  • Award Sites (Expensive and beware the fake idols)

Budgeting for these options depends on your marketing channels. A website alone, assuming you don’t build it, can vary greatly in cost: I’ve seen quotes as low as a couple thousand, and as high as over $10,000 per month for a website and SEO services. A recent study by the ABA Law Practice Division’s Social Media, Legal Blogs and Websites Interest Group found that the median market cost for a website was $5,096.

Google Adwords is a popular advertising channel for lawyers, but nailing down an exact cost to budget for is hard—you pay each time someone clicks on your ad, and it’s an auction-style cost (you bid against other lawyers), so it varies greatly. You basically tell Google the maximum amount you’re willing to spend per day and per click on certain keywords (“divorce lawyer”), and it runs the ads for you.

Note: be very careful handling Adwords yourself—I’ve seen a $10,000 spend day due to a couple tiny mistakes on a lawyer’s account. If you want Adwords to work (and it does, if done right), hire a professional, discuss a budget you’re comfortable with, and leave it to him or her.

So how much should you budget for marketing? Some advise spending 7 to 8% of your annual revenue, while others say best practice is to spend more. For a law firm that is just starting out, or that wishes to jumpstart growth or add a practice area, you’ll need to spend more than that. And referencing a percentage of revenue you don’t have yet is useless.

The best advice I can give you is to ask what level of revenue you’ll need to be comfortable, then take at least 10% of that figure and try to find room in your overall budget. Then, make sure your marketing plan is rock solid. It should include a website that looks great and loads fast, and advertising that is run by a professional. Local and social channels must be addressed too—and, before you spend that budget, you need to have intake procedures in place so you don’t waste the incoming calls.

Also, keep an eye on how much business you’re actually generating from your marketing spend, and in which areas of your practice. Keep an eye on the return on investment (ROI) of your marketing efforts, and don’t keep chasing a losing bet.

Bonus tip: Avoid debt when you’re just starting out

One final note on law firm budgeting and debt: I generally advise people to avoid debt and spend as little as possible when running a new business. With little to no debt, even if you fail, at least you won’t be further in the hole. (You do, likely, have student loan debt as well, after all.)

That’s good advice for the most part, but on the other hand, you can’t be too much of a spendthrift. A better approach is to spend wisely, and if you need to take out a small business loan or leverage a business credit card to float expenses for a month or three, that’s simply the cost of making money.

After all, if you skimp on marketing, you may have no clients at all. And if you don’t invest in the tools to make your practice run smoothly, you may not have the time to practice at all.

Creating a law firm budget is just one key part of running a successful law firm. For more essential tips on how to run your firm smoothly, read our free guide, How to Start Your Own Law Firm.

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Categorized in: Accounting