Vol. 79, No. 9, September
Managing Your Practice Finances
Actively managing your finances strengthens your practice and helps
to make you a better lawyer.Well-managed practices experience fewer
malpractice and ethics-related claims, and a well-run practice improves
by Thomas J. Watson
Thomas J. Watson, Marquette 2002, is director of
communications at Wisconsin Lawyers Mutual Insurance Co., Madison.
The daily pressures and responsibilities of practicing law might make
it difficult for you to find the time to deal with practice-related
financial issues. Taking control of your finances, however, can be one
of the most important keys to building a successful law practice or
keeping an already established one successful.
Proper planning coupled with ongoing control and review of your
finances are critical to achieving a profitable practice. As the
profession becomes more and more competitive, and the methods of
delivering legal services continue to evolve and diversify, the need to
proactively manage your finances grows in importance.
It's likely that when you went out on your own, your primary
objectives were to provide great legal services to your clients and to
feel the satisfaction and fulfillment of having your own law practice.
You are your own boss. You call the shots. You control your professional
life. You recognize the advantages, but are you aware of the
Your focus must be on providing legal services, but you cannot lose
sight of the need to also take care of the business side of the
practice. That means you not only have to watch the bottom line, you
need to know how to get there. Working hard in your practice often won't
be enough. Certain fundamentals of business success cannot be
You can take steps to better manage the finances of your practice.
You also should consider some long-term planning issues. Malpractice and
ethics mistakes sometimes result from losing control of the business
side of your practice. With good business planning, those mistakes can
Prepare a Business Plan
A lawyer running a solo practice or a small law office can find
professional happiness in many ways. But financial security is a key to
reaching that level of satisfaction. How do you obtain financial
Planning begins with a business plan and a budget. A successful
business, including a law practice, should be planned on paper before
the doors ever open. If you are starting a practice from scratch, your
business plan can help enlist banks, suppliers, and other business
partners on whom you will rely.
When putting together your business plan, be as specific as possible
in your projections about finances and budgeting. Show how you will
manage your cash flow. Set monthly, quarterly, or annual goals so you
can measure your progress as a business. Review those goals regularly to
determine whether you are falling behind or meeting or exceeding your
benchmarks for success. If you fall behind, you can identify the
problems and take corrective action before they get out of control and
drag down your practice.
If you are starting out, prepare a budget for the first year,
projecting your monthly income, expenses (and when they will need to be
paid), and potential unexpected expenses (costs often end up being more
than you anticipated). Do not overlook creating a marketing plan (with
allocated funding). Build in salaries, including your own, health care
expenses, office overhead, and any other costs you anticipate during the
year. If you do not have a historical basis on which to predict income,
do enough research to make an educated guess. You can always adjust your
budget projections as you establish your practice.
You should establish written policies and procedures for your firm's
financial transactions, and you and your staff should carefully adhere
to them. The more closely you maintain and manage your records, the
better your chances of avoiding mistakes and unhappy clients. Managing
your trust account properly (including trust account payments and
withdrawals), making sure other bank transactions are properly
documented, determining which employees are authorized to write checks,
and documenting invoices are all equally important.
Trust account mistakes can be especially costly, even to the point of
risking your license to practice. Make sure you are up to date on the
trust account rules and the proper handling of client credit card
Internal control of your business plan also pertains to your staffing
policies and procedures. Periodically review the following:
- staff work, including that of your lawyers, paralegals, secretaries,
and other office personnel;
- client files, including payments, trust accounting, disbursements,
and overall file maintenance;
- potential conflicts of interest; and
- staff productivity.
In addition, give your staff sufficient vacation time. Many firms
also allow for flexible scheduling, giving staff the ability to balance
their professional lives with their personal obligations. A happy staff
usually translates into a more efficient and productive one an important
key to your success as a firm.
There are several steps you should take to ensure efficient and
accurate billing. Establish consistent billing cycles. Make sure you
clearly communicate to your clients how, when, and in what form they
will be billed. Often, malpractice claims arise because dissatisfied
clients did not understand how they were billed and for what
Establish a systematic approach within the office to ensure that
every bill, every expense, and every payment is documented and accounted
for. Follow the development of your cases by reviewing work-in-progress
reports. Bill your clients at regular intervals and never send out any
invoice that has not been carefully proofread by the lawyer who
performed the services being billed.
Any disruption of your revenue stream, whether long-term or
temporary, will significantly affect your practice. Everything from
clients not making timely payments (or not paying at all) to an office
fire or other serious disruption will force you to turn to alternative
ways to meet your ongoing expenses, including your payroll. While a line
of credit may get you over some of the short term bumps, your disaster
recovery plan may protect your long term outlook. Your disaster recovery
plan should include backing up your financial and billing programs,
storing bank checks in an off-site location, and protecting your
documents and files.
Partnerships Require Planning
Many lawyers form partnerships or participate in office sharing with
other lawyers. Negotiating an agreement with the lawyer or lawyers with
whom you are partnering or sharing office space may feel awkward
initially, but it will be easier than sorting out the problematic issues
that might arise later on. In the long term, an agreement helps to
ensure that everyone knows the terms of the arrangement the
expectations, the consequences, and the procedures each lawyer will
Partnership agreements may include, among other things, the
- management issues
- any financial contributions
- possible income-sharing and compensation issues
- adding additional partners
- partner withdrawals
How do you assess how your practice is doing? How does any business
measure success? Cash flow is one measuring stick, but there are other
measures by which to gauge your success.
First, regularly review your overall monthly billings measured
against your projected billings. Is your gross income meeting your
projections? If not, now is the right time to figure out what needs to
be done to increase your gross income or to modify your projections if
they prove to be unrealistic.
Second, review collected billings measured against your budgeted cash
flow needs for the month. This will tell you whether you have positive
or negative cash flow for each month.
Third, compare your actual costs with your budgeted costs. This will
let you know whether you are running your office within the financial
constraints you initially implemented.
Fourth, keep a close tab on your account receivables. A growing
number of uncollected accounts can financially unravel any law firm,
especially a solo practitioner or small law practice. Act quickly on
unpaid accounts, remembering that collection attempts in some cases can
lead to malpractice complaints that may be more trouble than they are
worth. Minimizing your exposure to bad debts by adhering to your client
selection procedures and follow up procedures will save you money and
potential headaches in the long run.
Finally, keep a close eye on your trust account balances. Review them
at least monthly for each client. Are there funds that can be applied to
unbilled time or disbursements? Do you have clients whose accounts are
almost exhausted? Acting early will prevent you from doing a lot of work
for which you never get paid.
Financial management and planning usually is nonbillable work. Some
lawyers take short cuts with their business, thinking this maximizes
their billable time. They reason that as long as they are good lawyers
and work hard for their clients, their practice will be a success.
Unfortunately, this is not always the case. Proactively managing your
finances strengthens your practice and ultimately makes you a better
lawyer. Well-managed practices experience fewer malpractice and
ethics-related claims. In addition, a well run practice improves your
chances of having satisfied clients. Whether you are just starting your
own practice or you have been running your own office for years, sound
financial planning and management makes you a better and more successful