If you had asked me what it cost to start a law firm back in 2012, I would’ve said this: $7,810. Reading over that figure, it 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, including startup costs, recurring subscriptions, and projecting revenue. Then we’ll review some lessons I’ve learned through starting a law firm (twice).
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 to grow an existing practice, you can also use the advice below.
Law firm budget building basics
Like any good legal document, I’ll start with a disclaimer: Every law firm’s budget is very, very different. Why? New attorneys may need more equipment and supplies, while established legal practices may be able to bring these with them. New attorneys often get discounts on bar dues, CLEs, and even malpractice insurance, while older attorneys pretty much do not. Personal injury attorneys will need different software and will have a much more unpredictable income stream than an estate planning attorney.
All of that is a long-winded way of saying this: you need to make your own budget for your own law firm.
Why it’s important to have a law firm budget (and the risks of not having one)
A budget sets your expectations for cash flow and expenses throughout the year, reducing the chances of missing an expense or even worse, bouncing a check. You will also be able to set revenue benchmarks—giving your law firm a measuring stick to know if you are meeting your goals or if you need to adjust your business strategy to succeed.
A cautionary tale: I knew a lawyer handling high-stakes class-action litigation who would balloon up his staff to dozens of people after a big settlement, only to have to cut down to a single paralegal and associate until the next big payday. He’d run on fumes, reload through a settlement, and renew the cycle. It sucked for the firm, and it really sucked for the people who got laid off.
This lawyer’s problem, obviously, was pacing his spending. Conversely, I have a tendency to underspend: I’ll drive myself nuts DIY-ing everything, either to save the expense or the hassle of hiring someone to take it off my plate. Budgeting and projecting revenue can bring peace of mind to those of us who are so worried about spending that we forget that we need to spend money to have the time to lawyer.
Another big benefit of a budget is being able to set aside funds to cover the larger lump-sum expenses most law firms encounter: annual bar dues, malpractice premiums, quarterly self-employment taxes, and research and software subscriptions (typically cheaper with an annual license rather than monthly).
Steps to create a budget for your law firm
1. Brainstorm your firm’s expenses and resources
The first step is the easy part: Brainstorm mandatory expenses. You’ll also want to outline what resources you have on hand (starting capital, existing equipment, etc.) and set aside some money, either as a recurring expense or a percentage of your revenue, for all the surprises that you’ll encounter.
Here is a non-exhaustive list to get you started. Some of these are optional, while some can be found for free (Wave Accounting) or repurposed from what you have on hand (a laptop that is in good shape, or a smartphone). Some of your firm’s expenses will be incurred yearly, some monthly, and some only once.
For each item you’re considering striking from this list to save on costs, ask yourself two big questions: (1) Will the item save me time that I can put toward more billable work? and (2) Will it help me find more business? Because the benefits might be worth the cost.
For example, every attorney could get by using their local law libraries for research, but if you have to research often and the library isn’t next door, investing in the subscription might be worth it. And while a legal conference might seem like a luxury, the referrals gained could pay off exponentially.
Possible law firm expenses
- Bar association dues (state and local bars, if you wish)
- MCLE subscriptions
- Malpractice coverage
- Office space
- Utilities and internet access
- Laptop or desktop computer
- Backup cloud drive
- Printer and consumables (paper, ink, etc.)
- Scanner (either part of a printer or separate)
- Fax machine
- Landline or VOIP business phone
- Software and services:
- Cell phone service
- Microsoft Office
- Law practice management software, such as Clio Manage
- Accounting software
- Legal research software
- Business cards
- Advertising costs (PPC, Social Ads)
- Networking events
- Miscellaneous expenses
2. Project your revenue
Once you have your expenses itemized, the next step is to project your expected revenues in an honest and accurate manner, which is actually the hard part. I like to think of this as a “mapping” exercise, since a budget, to me, is essentially a map to a successful business—and yes, your law firm is just that: a business.
It’s also a good idea to incorporate your personal and business goals into the process. Do you need to meet certain revenue marks to keep the office lights on, or more importantly, to provide for your family? If you need to meet those marks, how can you realistically get there? Do you need to advertise heavily on Google Ads or Facebook? Will you have the time to answer and screen calls, or do you need to add an assistant or answering service to your budget as well?
When going through this exercise, it’s also worth asking yourself a couple of key questions:
What area do you practice in?
A key factor in projecting revenue is your practice area: Seasonality (think divorce and the holiday season) or gaps between contingency payouts (the personal injury practice) will drastically affect your revenue projections and cannot be ignored. These can be hard to predict, so if you are new to practice or a practice area, finding a mentor to chat with will be invaluable.
What can you do to make revenues more predictable?
Fee structures, collection rates, and payment delays can all impact your law firm’s cash flow. Personally, I use flat fees whenever possible, both for the client’s peace of mind and my own. This makes it a lot easier to budget than predicting the ebbs and flows of billable hours in a litigation practice. For those who do bill by the hour, evergreen retainers are a great way to prevent having a major accounts receivable problem and delay the time it takes to get paid. Taking credit cards helps a lot as well, and isn’t as scary as it may seem at first.
For a new firm, expect to make little to nothing for a few months, followed by slow growth throughout the year, unless you can afford a killer advertising setup to speed up the process up (remember: lawyers spend more than almost every other industry). That’s okay—with a pragmatic budget and a lot of preparation, you’ll still be set up for long term success. Stay realistic or you’ll set yourself up for disappointment or worse.
3. Document and track your budget
To track all of your planned expenses and revenue, you can use a premium solution, like QuickBooks Online, or something as simple and free as an Excel or Google Sheets template. There is a great free template in Google Sheets template gallery, made by Quickbooks, for an annual business budget.
As for how often to check in on how well you’re tracking against your budget, it’s probably a good idea to assess every month after you’ve collected on all your bills, at least when you’re first starting out. This will give you a sense of whether you need to adjust any of your projections or document any expenses you didn’t account for.
It’s also a good idea to set aside some time to formally review your budget each year. This will allow you to update based on any personal or professional goals that have evolved over time, and to ensure that the projected amounts coming and going from your firm are still reflective of your day-to-day operations.
Four lessons learned
Starting a law firm isn’t easy. Here are four lessons I’ve learned about budgeting over the years.
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 annual—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 and new solos, 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 safest, especially if you use a notable provider like Google Drive or Box). 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
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 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 kill the ongoing subscriptions first. But if the product allows me to bill more hours, 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 starts 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.
Advertising on third party sites
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: Choose carefully, and choose reputable sites)
Budgeting for these options depends on which marketing channels work best for your firm and practice area. 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. Ask these questions before hiring a law firm web designer.
Using Google Adwords
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 $10,000 spent in a 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.
Tip: Get more insights into effective law firm marketing in our guide, Law Firm Marketing 101.
Bonus tip: Avoid excessive 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.
How do you strike the balance between spending wisely and stunting your growth through stinginess? Getting started on that budget is the first step.
When to get started
In this post, we looked at how creating a budget for your firm will help you forecast what money you can expect to come in. We also looked at planning for the money that needs to go out. This means listing all of your expenses and planning out how your revenues will pay those costs. At the same time, this should help you achieve your personal and business goals.
We also covered a few areas to help you spend your firm’s money wisely. Ideally this will pay off in the long run.
The most important point, though, is timing. If you haven’t started putting together your law firm’s budget yet, the best time to start is now.
Note: The information in this article applies only to US practices. This post is provided for informational purposes only. It does not constitute legal, business, or accounting advice.
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Categorized in: Accounting