The Ultimate Guide to Budgeting for Lawyers (Year-End Series)

Welcome to Accountants LawPod, where accounting professionals and law firms converge, hosted by Lynda Artesani, Sarah Prevost, and Stephen Libhart.

Welcome back to the podcast, everyone. And, uh, gosh, we're just trekking right through the end of the year, aren't we?

I can't believe—

Somebody said to me the other day, like, oh, there's only so many weekends back till Christmas. And I'm like, don't, don't do that. Don't, don't do that. But, um, here we are. So this week we're going to talk about something that's really important because if we think about it, this is a great time to kind of reflect and look back because to start thinking about this, and there's a lot to do with— we're going to talk about budgeting and calling this the Ultimate Guide to Budgeting for Lawyers. But I think if you think about budgeting, budgeting, I, I don't know, I always feel like, remember your grandmother sitting with you and like, this is how we're going to budget this much for food and this is— teaching you that, maybe your mom or your grandparents. And I can remember doing that. And then the thing about budgeting is you never go back to it. It's easy to sit— not easy, but it's easier to sit and do a budget. But then if you never look at it again, that's the key. You need to have somebody kind of working with you hand in hand to bring you back to it, because making one and then never going back to it is not really effective.

Yeah, I, I also feel like the word budgeting is such a It's an icky word. It's a word that isn't presented in a way that— so I try to think of it as like, what's your baseline? What is your must-have? What is your nut on overhead expenses? What must you bring in in revenue against those expenses, including your salary? Because we all, the 3 of us always say that whether you are on salary as an S corp or a corp, or whether you're an LLC and you're in the owner's draw section, including yourself in that figure and understanding what that means. But I feel like the biggest part, and I know that Steve has brought this up, is being realistic about your numbers because he's gone— you've gone into the nitty-gritty, Steve, like for a firm, you've gone so deep. And it's like, really, let's just be honest and realistic about What is the overhead that runs the business fundamentally?

Well, and I call it plan your work, work your plan. What gets, what gets measured gets done. So, you know, to your point, Lynda, the icky budget word, I agree, but I like to bring that up and say budget and then watch the wincing and then go, okay, plan your work and work your plan. It's, it, that's what it's about. This is a gift to yourself. Embrace it, love it, and guess what? You're going to be really happy you did.

Because it forces you to look at it, right?

Yeah.

I think sometimes too, if you just put— because a lot of lawyers do this, they put their head down, they work really hard, and they don't look at their numbers till January, February when you got to get it ready for taxes. And by then it's too late. You can't really do a lot for the prior year. And then how many times you sat with a lawyer and going through everything, and then they say, I'm going to be so much better this year, and they go right back to their habits of Not putting their head down, working hard. And I think sometimes that's a factor when you're looking at it. And overhead, everybody should know the nut. They should know exactly what it costs to run their firm without any profit. What does it cost to run this firm? You need to know that number. And I think a lot of times they don't.

Yeah. Well, okay. If you think about at the very beginning, for those of you that are starting out or that had started out, you needed— you knew that you needed to cover rent. Let's say if you rented an office, you needed to cover yourself. So those were the starts. Then you had a few other bills, like you had your dues and subscriptions. Obviously, you needed software to run some of this stuff. And what was it going to cost for insurance, general liability, professional liability, bar dues? Those are like basic, basic things. Where it gets different and gets added on to is when you have to think about advertising.

Yeah.

And I'm just kind of thinking through here and chime in if you guys have got some more thoughts on this. Other professional fees. If you're gonna hire recruiting, pick up a paralegal. Yeah.

If they do investigative work, like they need to do discovery and they need to get— hire somebody to do research, there's a lot there. You're talking client costs, but you still— they front them even though they get reimbursed them. They front them, which means they have to have the capital to do so.

Right.

That's big.

Yeah. And if you are—

Insurance is huge.

Insurance is huge if you're going to Do payroll, understanding the price of payroll, health insurance, the other benefit offerings that you're getting.

The employer's contribution to taxes.

Yes, exactly. And then from there, uh, the other ones are— they might be fundamental to you depending on the type of law you practice, to your point, Lynda, like you're saying, or they might be fundamental to just for you to want to run a business. Are you going to have certain subcontractors do things or certain dues and subscriptions for AI tools. I mean, let's be honest, people have so many AI tools now, it's a bit redundant for some. And then also your efficiency, your practice management. Is it going to grow with you? Did you kind of go cheap and now you need to spend more money? What does that look like? There's like a whole path, but fundamentally, you started out, you have a baseline. That's what you have to do is create that baseline. You can do it by month, by quarter. You can build these budgets in your financial software such as Xero and QuickBooks. You can have them in there. You can use them. Lynda and I have done it where we've taken prior year with a percentage increase month over month and built the budget that way.

Mm-hmm.

But then that's when we start going into the expenses and look realistically at those expenses, like how real And how necessary are they that you need them?

If we can talk about the software a little bit, Sarah. One of the things that really— I, I see it, we see it so many times over where they started out and they just wanted to go bare bones. You know, they probably bought QuickBooks Simple Start because they just want to get it in. And then they— that which isn't the end of the world because you can grow into a bigger—

you can grow, sure.

But then if they bypass all legal tech and they go to the spreadsheet. You can't grow out of the spreadsheet. So, and the fact that we've had a couple of brand new clients to us, fairly new this year, and that have come to us brand new, just starting out, and they've said, I want to do this right, and I've been listening to your podcast, and I've been doing this research, and I've read your stuff on your website, and I know that I need to do this the right way, and I want to make sure I'm in the right software, and I've already researched all the different software, and I want to get in it at the ground level. That is the smart way to do it, because otherwise you pay us to go back in and put all what's on your spreadsheet into Clio, for example.

Yeah, the migration of services is expensive.

And it saves you money when you start to set things up in like Clio. If even though Clio has a cost to it, the time savings to you to have everything in one place, documents secure, right? We've got security there, which is huge in today's world. And the fact that you're going to get it all in there right from the beginning is And we've had—

Be well spent.

2 of them, 2 clients this year that came to us and I'm like, wow, I'm so impressed that you're doing this now and you're hiring us to help you through it too. Not just setting it up and then coming to us, you know, 6 months from now going, this isn't balancing. And then, you know, Sarah jumps in and looks at the settings. I said, oh, you got this all wrong.

Well, you know, when they, when they start out with the spreadsheet, I think that's their comfort zone. They're like, I can do this. I know how to do a spreadsheet. I learned that in college or high school or whatever. And if you can address that and say, okay, great, good for you. But to your point, Lynda, what you just said about Clio and, and the security and, and having all of the data where you need it to start out, you're gonna, you're gonna save so much time and so much money on down the line, and you'll be able to grow so much faster and more efficiently and smarter. It works smarter, not harder.

Yeah.

You know, so, so, you know, step out of that comfort zone.

When you're talking about the software, so that's a, like, really, that should be a front expense. Like, that should be a foundational piece that we think about. Can I ask you 2 about how you would go about for taxes? Because people don't think about that portion of the budgeting segment. So how would you, how do you see that in supporting a budget? Or because it doesn't sit where we would normally see it sit.

Well, That's the thing too. When you're starting, a lot of lawyers don't even know that they have to pay estimated taxes.

Exactly.

A solo membership or a partnership with someone, and they don't even think about it until all of a sudden someone says, you know, tax person in January or February says, where's your estimated tax payments? And then you're— they're looking at them going like, my what? And I didn't know I had to pay these. And then they find out they're going to be penalized because they didn't prepay. And it's based on the quarters and how much you made in the quarter. Not overall for the year, even though they kind of base the amounts on the amount you made the year before. And it's that mystery amount too, because the tax person just kind of hands them paperwork and says, this is what you got to do.

A coupon.

Yeah. And they don't know what that is, right? They don't understand it. They don't want to ask questions because they're really highly intelligent and they don't want to look not intelligent with anybody. So I've— we've had this conversation with a lot of them. To explain it, to take the mystery out of it, I think sometimes, because it feels like, it feels like it's a mystery number. And then when you sit down and explain it to them, they're like, oh, that's all it is. It's really not that mysterious. But nobody—

they don't—

the tax person, generally you talk to them when they're at the busiest time. They don't have time to explain it to them.

Well, and the thing too, when they— when they— sometimes they'll be deer in headlights when they see that number because maybe they haven't saved money for it. So, you know, the best advice to give them is pay what you can. You know, that's going to look a lot better with the IRS at the end of the year that you, you made a reasonable effort to pay these taxes than if you just don't pay anything at all and then you have this gigantic tax bill at the end of the year. There's lots of ways to work around it, but to what you're saying, Sarah, you know, budget that, you know, budget that in your cash flow.

Yeah. When I think about, um, our prior episode with Danielle and she was saying a third, a third, a third, essentially, right? And when you think about for every dollar that walks in the door gets an allocation, very simplified method, $1 gets allocated so much to percentage of expenses. So just play the numbers out.

I'm glad you brought that up again. Yeah.

70%, let's say, is allocated to expenses, and you're included in that. So let's be fair, like you're included in it. And then the 30% should be allocated technically To taxes, let's say. So we're saying that for every dollar, 70% of that dollar is allocated to expenses to run the firm, and 30% should be taxes, hypothetically. So 30 cents to every dollar, and then multiply that, and that should be set aside. Now, some people have what Lynda and I have referred to, and I don't know if you see this, Steve, yourself. I'm sure you do. What's called comfortable in the bank. So you have a bunch of operating cash because it makes you feel good, like you have a cushion. Totally respectable. But then have we decided to plan a portion of that to taxes, or what portion of it is taxes? So kind of rethinking it. But if you think in a simplistic model, for every dollar earned is in that percentage. And that's what I thought about visually when Danielle was talking. If I was to take just my own firm, we take our own firm and we do percentage-based regardless of all the complexities on the other side. I think that's an easier way to look at planning that one.

Don't you think it doesn't hurt as bad either if you take a little bit of that income every month that you know you're gonna have to pay in the quarter and kind of put it away and get it out of the operating account? Then when you have to pay it for some mental reason and you pay it out of a different account, it's not coming out of capital, working capital, because it's already been placed aside those taxes. I don't know, for some reason it just feels different.

And you get to be proud of yourself.

Yeah, because you planned for it. And then you're not paying a big amount on April 15th, right? Where you're not sitting there going, oh God, I gotta write a $30,000 check. Where the heck am I gonna get this money from?

Well, here's where people— here's where people on our side of the fence— I'm sorry to interrupt— can be, be so helpful. Accountant people here that are working, that are servicing this industry. Don't be afraid to have this discussion with your client. And don't be afraid, let them know that you wanna talk to the CPA/tax preparer and have that dialogue going because they're going to feel like you're protecting them in this ring, this arena with the tax dollars. And to your point, Lynda, then you have that 3-way conversation going. It's less of a sting even when you don't have the cash flow. And you'll find that they're gonna trust you more and it's— they're gonna understand that this is not plug and play. Especially when they're starting out. There's a lot of back-of-the-house things that have to be looked at, and this is a huge one for sure.

I also feel like that whole thing— and we've— I mean, Lynda, you've brought this up— we P&L, net income. Well, where's that money in my bank account?

Where's it going?

Yeah, that season's coming, right?

Yeah. And everyone has that question. But really, if you think about it too, the cash that you're holding in your business, that is Money that you're going to be paying taxes on. It's your decision at that point too. What hurts us is when firms— and I understand it— is you want to take all the funds out. Okay. But with that comes a whole deficit of a 45-day, let's say, runway of bills.

Yes.

Yeah. Don't do it.

Yeah.

Just don't do it because it's hard.

Because we're going to have to tell you to put it back. Don't do it.

It's the worst feeling. So I think in the planning of it, to what you're saying, both of you, is like having a dedicated account where you just— even if you want to do a flat rate, let's just say you don't want to do that 30%, 30%, 30%, like saying, Steve, you're just doing $1,000 a month. That's just, for example, to start out. And maybe some months you can't do it, so you have to break it down a little bit, and then you increase it on the next month when you have more cash flow. But you're consciously planning it is what I'm thinking. So, I don't know.

It's no different than your personal life when, you know, all of us have ups and downs in our personal finances. And, you know, how many cans of soup do you have on the shelf in the basement right now? You know? So it's, it's the same thing in the business. And, and don't give up. That's another thing. When I— when people have that sticker shock and they're like, oh my God, I'm beating myself up. I didn't plan ahead. I didn't budget. I didn't save this money. I'm done. I'm just going to merge with another firm. It's like, hold on, hold on, you can work your way out of this. You know, don't let that, that put blinders on you. Let's do a budget now at this point. Let's figure this out.

I don't know. I, I've— Lynda and I've been seeing it more and more. Some people, it sometimes is the entrepreneurial exhaustion, but what we find is the grass looks greener. You're so unhappy because You kind of— it's like being pregnant for those of you that have been pregnant and then you forget, right? You kind of blissfully forget what you give up if you aren't owning your own firm.

But you budget too. You're going to budget. I think it forces you to look at the numbers. You're budgeting what you think you're going to make too. Just not just the expense side, the income side. What is your goal?

How much you set goals.

Right?

So if you start to look at that, You know, increase it 10%, then you need to look at how is it going to increase the marketing budget. Do you think if you're going to grow, you're going to have more staff? Do you need to start looking at putting money aside because you're going to bring in another attorney? And that attorney is going to generate income, but not right away. You don't get the money like they just worked Monday and then Friday the money's rolling in.

Exactly.

So, you know, that's another month down the road. So you're going to have some expenses to outlay before the person's there.

Yeah.

So that's another, you know, as they come in, you're going to look at at least a month out, if not more than that, think 90 days. So you want to be able to have enough cash to pay them in the interim before they start generating income. So I think you got to look at those things too. Look at your fixed costs, look at your variable costs. There's just a lot there. And really think about maybe having this conversation with your bookkeeper, your CFO, whoever you have that works with you. That will hold you accountable, that will revisit it in the end of the quarter and say, here's where you're at. Here's where you thought you were going to be because it's a guessing game. Here's where you actually are. And what adjustments or tweaks do you have to make going forward to get to the end of the year?

I think it's— I love what you just said. And I think it's really important, like Steve was saying, share it with us, please. Because if we don't know—

Yes, please.

We're just doing the work. But the other thing too I thought of, Lynda, when you brought up software earlier, this hit me. Is sometimes, is the software you're using, the current software you're using, we said Clio earlier just because we work with it. We just came from—

Of course.

But the software you're currently in, does it actually serve you well? Is it advancing well? Or are you going to get one of those sticker shock moments where they've been bought and they're just going to do away with a certain level of tier and you're going to get double the rate and that's not, you're not planning on that. Um, that variable expense, like you're saying, is, I think it's, that's where you're in that living kind of budget where you're really in it a lot.

And if you're in a software that's okay, it's working well, does it integrate with QuickBooks or are you having to do redundant work? Because exactly, that's why I mentioned Clio, especially coming off the conference. Um, they really wowed me with where they're going with, uh, the AI. I don't think there's anyone that can even touch them right now when it comes to the future stuff. Sure, somebody will come along the way with a great idea or an even better system, maybe. I don't know. I don't see how, because they have, they have the wherewithal. They've been planning this. This isn't something that just poofed in their mind last year. This is a plan for them.

Yeah.

And I think that when you look at software like that, you want to ensure— and I, I think of some of the ones that I have to deal with now, and they seem so archaic because they're— I gotta go into one and push the data out because it doesn't always go across. And, you know, did it work? Did it break? Did somebody change a number or a letter on one side and now it's broken and I have no way of knowing until I get an error? And I think sometimes I look at some of these software or some that don't connect at all. I don't care what their website says, they just don't connect. And why are you in that? Because why are you making more work in today's world? Automation should be your first priority because why should you be doing things twice? Why should you have software over here that's doing your billing and yet you've got to have the bookkeeper go type it in and put it in as income through the bank feed because there's no AR connection at all? That you cannot see the AR in QuickBooks, in whatever the product is. It doesn't make sense to me why you would spend more money because these also all cost more than Clio. Why are you doing that with that work? And if you're in a— if you're a big firm, that's different. Maybe you're in a, you know, a bigger software like a Litify or something like that. You need to be in that heavy-duty software. But most of the firms, they tend to be small to midsize or small midsize or whatever. They work with Clio fine. And to not—

No.

Software that has all that, it's just so much there. What we saw at the conference, and I know it's just the very beginning, was exciting. Especially for the attorney, even more so than for us. What we saw that was going to happen with the attorneys, how it's a game changer.

It is.

Like a Clio commercial, but it's a game changer because of the fact that it's going to be— says the girl who's always promoted LeanLaw, and I still love LeanLaw, but it's a game changer because they— the speed at which you'll be able to get jobs done accurately with good data to support it. You're not just on ChatGPT. Don't patchwork it with ChatGPT because it is not Yeah, it's not built. It hallucinates. Don't hang your hat on that. Get with something that's going to have a system in place.

And, well, and talking about budgeting, I want to circle back a little bit. And I, and I can't pronounce this word right, so here we go. But there are peripheral— I can't say Worcestershire either, but there are peripheral things That once you work this budget up, there are things on the outside of the budget that you can still have this peripheral set of numbers going. As an example, in Clio, the lockup reports.

Mm-hmm.

Oh my gosh. And you've heard me mention those before. I just love those because those are telling you what you can expect in future cash and when, if you do certain things with your lockup. It's amazing. I love those numbers.

Well, I think it's like reverse planning, right, Steve? It is like what Lynda was saying is we're talking so heavy expensive, but you can think about, okay, well, when this happens, what am I going to do in the future? I'm going to budget for that. Yeah.

Steve, it's all about the data. It's all about the data. It's your KPIs. It's your data, right?

You're not— Oh, there we go. Oh, the harps are playing.

I'm going to make a joke here. Next time I'll wear green glasses so we can have a different software topic. No, I'm kidding.

Yeah, that, that'll be your cue. You should just have a pile of glasses there. When you switch in the middle of the podcast, we know we have to switch.

I love that.

I know what you're talking about.

But I, I, I mean, what we've given here today is really fundamental processes of thinking about a budget, how to plan for this budget, and also how to construct it in a way that is measurable. Because like you said, Steve, and a lot of people say this, people that have been You have a lot of social media gurus out there and people that talk about this. We don't talk about how many times we fail to get to this stage.

Right.

There's so many micro failures in there, and a lot of it does come back to planning and budgeting. And something you both said earlier, and I think it's really important to talk about, what you're doing on the business side is a direct impact on that personal side. So by not doing just even the start on the business side, if you're not good at it in personal, I mean, if you start it in business, it'll help you with the personal side, I feel like, a little bit easier. That's my impression.

To answer your question, when you said, where's all the money? You took it as a distribution.

There it is.

It's on the balance sheet. You took it out. You took it out of the profit, right? There's your answer.

And how does that flow into your tax bill?

What do you mean it's not my pay? Shouldn't it be on the— I mean, you know the questions that come because And it makes common sense, right? Why, why isn't it on the P&L? Well, there's a reason for it, and it's your distribution. It is not shown as—

Where is all my cash? All your cash is also paying for those liabilities and those loans.

And that stupid QuickBooks loan that you took out, which you shouldn't have, right? That's that $33,250.

Well, there is that. Yeah.

I gotta put blue back on. No, I'm kidding. Oh man. Well, that's a good point.

So folks, get busy and start working on those budgets and call upon us who are here to support you, to help you with that process, to hold your hand, to take the fear out of it, and then embrace it throughout the year. Oh, and you know, there was one other thing I wanted to toss in there. And I want you guys' honest opinion. You may agree or disagree with this, but I always warn people, make your budget, make it as realistic as possible, but then let's pretend like it's April and suddenly you blew all the money that's in a certain bucket on the budget. That doesn't mean you sit down and change your budget numbers so that you look better at the end of the year. You, you, you learn what you, where the mistake was and plan for next year and leave that variance in your budget versus actual reports so that it's glaring at you at the end of the year. Why didn't I have this much money at the end of the year? And there it is in that bucket.

And that's where you want your rainy day fund. You want to have some way to get cash influx for whatever. comes your way. And that's a great example of where something wasn't planned and you have to cover it.

Yeah, right.

Well, that's a good topic.

It was a good topic. I'm very passionate about this one. I love it.

Yeah.

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