Budgets are crucial to keeping your business on track. But, it can be challenging to know what to include in a budget. Read 8 Figure Firm’s blog to learn more about how to create a budget for your law firm.
What is a budget?
A budget is a financial plan based on your company’s estimated revenues and expenses for the year. It is an invaluable tool for both you and your executive team to utilize in order to keep the finances of your business on track and be prepared for any unexpected issues. Budgets can provide many benefits, including transparency, better goal setting, and maintaining accountability.
What does a budget include?
There are many pieces that go into making a comprehensive budget. Let’s go over some of the most important ones.
An excellent starting point is your company’s estimated revenue. To calculate this, you will need to utilize your strategic marketing plan alongside your predicted caseload and cost per acquisition and factor in the type of payment your firm receives, upfront or contingent. If you run a contingency-based firm, calculate cases settled, new cases brought in, average settlement revenue, average settlement period, and any other delays before you see the money. Being able to accurately provide projections for each month is a crucial step in providing a baseline to build the rest of the budget around.
There are three types of costs you will need to account for in your budget. The first of these is your fixed costs. These are the expenses that will not change with the business’s performance. These costs include large fractions of your expenses like payroll, rent & utilities, insurance, and loan payments.
Figuring out the unchanging expenses is crucial for your budget. Combining this with your estimated revenue gives you a look at how much you can spend on variable and one-time costs. Fixed costs are harder to dial back on if you need to cut items out of the budget, so getting those locked down allows you a more narrow field of vision when reducing spending habits.
Next are variable costs, which change depending on the success of your business. These costs can vary with the caseload of your company and can be drastically different even month to month. The best way to estimate your variable costs for the month is by referencing the past two months of cases, paired with how your company performed in that month last year relative to the rest of the year.
Trying to account for changing costs can be tricky, so budgeting towards the high end of the range lets you plan for heavy spending, and if it’s not required, then you end up saving money that month. This type of planning ensures you are prepared for issues that arise unexpectedly and can help you save for larger goals such as a new office location.
One-time costs are often linked with the start of your business but can arise as your business carries on. These costs related to starting your business include equipment, furniture, and licenses. After the startup period, one-off costs often cover services like market research or logo redesign through a third-party vendor but can include items such as severance pay for laid-off employees.
One-time costs can be difficult to predict, but having an idea of your plan for the business that year can help you allot the proper spending to months or quarters where you may use a vendor, or by keeping a small amount budgeted, be prepared for any last minute problems that may show up.
Your expected profit can be broken down into gross profit and net profit for better clarity. Your gross profit is your expenses from acquiring clients and your employees’ billable hours, subtracted from the revenue earned from the case settlement. Net profit refers to the number after your gross profit is combined with the expenses of operating your business and your taxes. Both numbers are essential to have in your budget.
Looking over your profits for the year allows you to reflect on your spending and where expenses could be cut or delegated differently in the future. Additionally, the profit at the end of the year lets you determine how much can be reinvested into the company for the future.
Speak to the Experts
It can be difficult creating a budget for your business. However, a comprehensive budget provides a solid guide to keep your firm on track to exponential growth. It also benefits your business and can reduce issues along the way.
Although they have many benefits, it can be challenging to write an effective budget. Here at 8 Figure Firm, we can help you through the process with ONE.Coach, our proven program to help you grow your firm.
If you’re ready to take your law firm to the next level, register for ONE.Coach today. We’ll help you turn your law firm into a law business.