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Budgeting for your practice’s lean months

BridgeTower Media Newswires//February 26, 2015

Budgeting for your practice’s lean months

BridgeTower Media Newswires//February 26, 2015

CJanuary sucks.

I don’t know what it is about this time of year, but it’s not just me. I’ve talked to other solos or small-firm lawyers, and almost all of them have said the same thing. January sucks. It’s not the weather (although let’s not kid ourselves; the weather hasn’t been pretty). It’s the clients.

They’re just staying home.

Most of my work is on the criminal side, but I also do civil litigation for both plaintiffs and defendants. Now plaintiffs have the ability to choose when or if they want to bring a civil suit. Is it worth the time? Is it worth the cost? And often, how much do they really care? Plaintiffs have much more flexibility about hiring a lawyer. Civil and criminal defendants, however, have no such luxury. Obviously they can choose to represent themselves, but if they need a lawyer, they need a lawyer now.

And still, January sucks. The whole first few months of the year work seems to slow down, and even existing clients seem to have problems at this time of year with paying their bills. More so than usual, I mean. The simplest answer is that Christmas messes everything up. Christmas. Humbug!

It makes sense, though. Christmas is an expensive time for most people; you travel to visit your family, or host your family traveling to visit you. You buy a lot of gifts. No one wants to short-change their family to pay their lawyer, so they forgo hiring a lawyer — or stop paying the one they already have — when those credit card bills start rolling in.

This is the short end of small-firm practice. In the good months you’re living high on the hog — but there’s no guaranteed salary. So the question is not whether you budget (hopefully you do, although all budgets for solo practitioners are, in some sense, aspirational). The question is whether your budget tracks with the trends in your practice.

Your business plan has a budget, and you’ve updated it year to year with your changing practice. But if your budget is broken down into 12 identical monthly plans, you’re probably not tracking trends. X dollars for office space, Y for office expenses, Z for subscriptions or recurring payments; most of your expenses will be identical every month—or at least even out. Your office rent doesn’t change month to month. Your use of printer paper and ink may fluctuate a bit, but unless most of your business is doing personal income taxes, there’s probably not one period where you regularly see a huge fluctuation. You probably know, and budget for, those once-a-year expenses (your license, website renewals, etc.). But just because your regular expenses are, well, regular, doesn’t mean you have to budget them that way.

Unless you’re doing a volume business, you will have good months and bad months. It’s the nature of a small firm. This is especially true for new, solo practitioners, who may not have a steady stream of clients, a good operating reserve, or a good handle on yearly trends in practice. But budgeting for trends does not have to be complicated or the product of years of tracking. If 50 percent of your estimated income happens over a three-month period, there’s no reason to only budget 25 percent of your expenses over that same period. You’re not doing yourself any favors by dividing expenses into arbitrary (and often capricious) time periods. Rather, divide your budget by income. If your estimated expenses are X percent of your budget, then X percent of all your income goes toward those expenses. It’s a more accurate way to budget, especially for new (or smaller) firms running close to the line.

Of course, there are drawbacks to this approach. First and most obviously, having a monthly budget tracks with how you actually pay your expenses — it’s a small minority of commercial landlords who will tie your monthly rent payment to your income, so there’s a minimum threshold of expenses you have to meet, whatever your income is that month. Second, it’s also more work. Budgeting by percentage of income requires frequent retooling of your budget as income rolls in, to make sure that your estimated income and expenses are going to be pretty close to your actual income and expenses. If you already hate the amount of administrative work you do as a solo attorney, it’s probably not the way to go.

The major benefit to this approach, though, is that it can help alleviate problems with the fluctuations in income that naturally occur in most small firms. By adjusting your overhead to fit your firm’s income, your take-home pay becomes more even and predictable. That way, you have less to worry about in those lean winter months — especially when it comes time to pay all the credit card bills you racked up over Christmas.

– By Michael Kemp. Kemp practices law in St. Paul, Minnesota.

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