Wisconsin Lawyer
Vol. 79, No. 9, September 2006

Managing Your Practice Finances

• Solo, Small Firm & Technology Conference Promises to Keep Your Practice on Track

by Thomas J. Watson

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 pitfalls?

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 ignored.

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 be avoided.

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 security?

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.

Budgeting

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.

Internal Control

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 payments.

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.

Billing Procedures

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 services.

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.

Business Disruptions

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 follow.

Partnership agreements may include, among other things, the following:

• management issues
• any financial contributions
• possible income-sharing and compensation issues
• adding additional partners
• partner withdrawals
• dissolution.

Measuring Success

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.

Conclusion

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 lawyer.

Wisconsin Lawyer