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Developing a Budget
by Barbara Lewis MBA and Dan Otto MBA

 Few law firms have budgets, yet developing and monitoring a budget can contribute to your firm’s fiscal health.  

 Used as a targeted goal, the budget is segmented into two areas: revenue and expenses, from which profit and profit margin can be calculated.   Revenue projections are a function of past growth, marketing and seasonality.  By tracking previous years’ growth, firms can estimate the future year’s revenue. 

 Law firms should examine their expenses for the previous year to calculate the expenses for the following year.  Expenses can be fixed or can change by amounts related to inflation, additional employees, revenues or events.  For example, the telephone expense is usually related to the number of employees. 

 In the expense analysis for the previous year, items that appear high should be investigated.  For example, one firm found a huge messenger expense that was unnecessary. 

 The annual projection, known as a pro forma, will give you good estimates of your revenues, expenses, profits and profit margin.  These amounts are the targets and should be measured monthly and monitored for variance from that amount. 

 By monitoring this data, you can quickly ascertain problem areas.  For example, when one of our clients discovered that his revenues fell slightly in the previous month that historically was his best month, he boosted his marketing campaign and finished the year on target. Had he not discovered the problem early on, he would have, undoubtedly, experienced a decrease in revenues that year.

 By performing these calculations, you can estimate your monthly income and your profit margin each month. The average law firm profit margin in 30 percent before partner draws and can be as much as 60 or 70 percent for a small firm with only a few attorneys.  

 Cash flow is one of the biggest problems for businesses.  By calculating revenue and expense projections, you will be able to estimate your monthly cash flow, which contributes to operating a healthy firm.

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