Advisory Services Budgets for Law Firms

This week we're gonna talk about budgeting and we're really gonna start to talk more about having those advisory-type conversations with your clients. Talking about budgeting can sometimes— everybody has that kind of a— I always think of your grandmother with the envelopes, right? You're always afraid to think about that. They put so much away for this, so much away for that. And the envelope system, kind of like the Profit First system, but very similar. So you want to start to think about having these conversations with the client because most of the time when we pin them down for a financial meeting, it's always to talk about the past. And budgeting is really about financial goals and strategies in the future. So it's important to start to have these conversations with your client, if not monthly, quarterly, to start to direct them and get them thinking about their business and where they're going to. A lot of times they get so busy and wrapped up in their businesses that they don't think about where they're headed to. So there's really several components to looking at budgeting. The first piece is income-driven, so the services that, that they sell. You really want to look at that piece of it. A lot of times clients will either overlook the fact that they're maybe having the same service all the time, or if they're if they have multiple ways of generating income into their firm, they kind of want to segregate that and look at it to see which one's maybe performing better. So of the 5 aspects, you start with your income side. So for income, we're looking at legal fee income basically, but again, you can break it down by practice area, especially if a firm has multiple practice areas, break it down by location if there's multiple location. So that's something to consider in your budget when you work on the budget. And yeah, you could simply go to QuickBooks and say, make me a budget based on last year, but you really don't want to do that. You want to start with that conversation with the client to know where they're thinking of their direction of their firm is. Are they in a space where they see their firm growing? Are they seeing— are they in a place when they're seeing themselves leave the firm? You want to have these conversations first so that the budget kind of makes sense. You really want to understand what their projections are. And then it gets into looking at, like Sarah likes to call it, the net-net. So the amount that it costs to run the firm, how much income needs to come in to pay all the expenses down to zero. So you're not making a profit, you're not having a loss, but you're completely covering what's in there. So something to think about, start to look at like fixed expenses. We're talking like rent, utilities, obviously wages is another piece. Any loan payments. Those are things you have to consider. So those are the kinds of things you want to look at when doing a budget and consider as you start to look at those fixed expenses. You also want to look at your debt. So debt might fall into your fixed expenses, like if you have a mortgage on a building, like if the firm owns a building or if you have loans out there, you might want to look at that and it would fall into that bucket. But it's also— it could be also something that you look at as far as loans is how much money is walking out of the door. To pay for past debt, money that they had to bring in, an influx of money. A lot of our clients did go and get the SBA loans and they're still paying those down at a very low interest rate. But you want to take a look at that debt and see how that's working. You want to have a good look at flexible and unplanned expenses. So it's— this is where the planning comes in, right? So you want to budget for any flexible expenses, any unplanned or emergency expenses. Flexible expenses are the ones you refer to that you don't necessarily need. Think new pair of black shoes. But in a law firm, you can think of those expenses that they might be spending on software or something like that, that might not have been expected, but it might be the latest and greatest and it saves them time. But the implementation of that new software might be an expense that they're not understanding that they need to commit to and also budget for. And that's also an area that— because then it becomes paying for that new software, but also paying for the training of the staff. The training of the staff means they're not working on billable work. You also want to look at savings. Don't forget savings. That rainy day fund or cash on hand is money that you're investing in your future. And a lot of times firms don't really want to put money aside for that. But it's really critical because we don't know what the future is going to be. You want to have about 20% of income booked away for that rainy day. So— Minimally, maybe 15, minimally you want to start to put something in a savings account. Right now they're performing well with interest, so it's not a bad place to stick some money and have it sit there and create some interest generation for the firm, but also have it there in case something bad happens where we have a reason, maybe a downturn in the economy, which we are seeing a slowing down despite the record, the report saying that there's a lot of people being hired, you're seeing inflationary prices. So the prices of things are costing more. The price of gas is up. Anything to get any product to us is more expensive. And as we noticed this, some of these expenses are climbing. You might even see in some states where this— they have to cover some of the money that they upfronted for things that were spent during COVID or any of those emergency times in the pandemic. You might see that the states are kind of languishing and they're trying to create more money and you might see some taxes or licenses or anything like that go up in price. So you want to put money aside for that. Put money aside for maybe something happening where you don't foresee it, but you know that you wanna have that money aside. A few months set of salary, maybe 6 months of salary kind of tucked away, 6 months of expense money tucked away for that rainy day. It's not a bad thing. Mm-hmm. So start to think of that, and you don't have to maybe dump that all in in one fell swoop, but you might want to start to think about that as you start to budget, because then we can get into forecasting as well. But it's also very good to start to look at a budget. Of course, budgets are only as good as the people creating them, and if they stick to it and they held themselves accountable. And that's where we come in as accountants and bookkeepers. We're able to sit with the client and look at the numbers. Mm-hmm. "Look at the metrics, analyze them. Here's what you budgeted, here's what you spent." And that's a good way to keep the client very involved and engaged in their own books. You won't be— you won't be— you won't be sad that you didn't do this for sure. It might feel like you're bothering the client, but if you're including advisory services, this is definitely one you want to step into and start to implement with your clients. They'll be very happy that you did. And I think you'll be— surprised that even if you have the beginnings of that conversation with a client, you might hear back from that client that no other bookkeeping service— nobody I've ever worked with has ever asked me these questions. And it opens the door to find out maybe the client is expecting to gross, you know, gross revenue to hit over $1 million or $2 million or whatever. You're going to start to see what they're thinking and you're going to understand where their direction is in their business. It's going to help you plan. And having these conversations are critical to do today to really have a successful bookkeeper/accountant/client relationship. As we like to say at our firm, it's partnership. We're a partner of yours, and we're really hoping that you do very well. Stay tuned.