A Business Plan and Budget: The foundation of a successful and profitable practice
Hard work alone does not guarantee financial success. A business plan and budget are essential for any firm, new or old, and can help you better understand the finances of your practice to ensure a more profitable future.
Taking an active role in managing the finances of your practice is critical for building a successful law practice, regardless of whether you are just starting out or have been in practice for many years. Often the day-to-day pressures of keeping up with client work make it difficult to find the time necessary to properly deal with practice-related financial issues. Nevertheless, foresight, active planning, appropriate internal controls and an ongoing review of current finances are critical if your practice is to be successful and profitable. The need to proactively manage your practice's finances will become even more important as the profession becomes more competitive and the manner in which legal services delivers changes.
Many lawyers start out in practice with an office lease, a line of credit and the best of intentions. Initially, most do contemplate the financial needs of their practice. But too often, they don't give it all the attention it deserves – especially as things start to slide downhill. They honestly believe that things will "work out." They are under the assumption that the road to success is paved by simply working harder.
However, working harder may not be the solution if you haven't kept your eye on the fundamentals of business success. As in many things, timing is everything. Rent, salaries and other bills all have to be paid on time or you risk losing both your access to credit facilities and even your practice. When you combine overdue bills with clients who refuse to pay or delay in making payments on your accounts, you can easily be caught in a financial squeeze.
Planning is essential: Financial security and happiness are rarely an accident. Planning and building a successful practice should start with the preparation of a business plan and budget, and the implementation of appropriate internal controls. You should also be prepared for any unexpected interruptions that may affect the finances of your practice, and in particular, have appropriate insurance in place.
Prepare a Business plan
A successful business should be planned out on paper well before you open your doors – and even if you are already in business, it is never too late to create a business plan. A business plan is your roadmap to the future. You can show it to banks, suppliers or others whom you deal with to start up or run your practice. A business plan tells them that you have done the necessary homework to launch and build your practice.
What is a law practice business plan and what does it consist of? It is a concise and organized summary of how you intend to start and remain in business. It is composed of four main areas: a general description of your business, your financial plan, your management plan and your marketing plan. A more detailed description of what should be included in a business plan for a law practice is available at www.practicepro.ca/financesbooklet.
Be precise, especially in the finances or budget part of the plan. Budgeting and managing your cash flows will be a big part of remaining in business. It is an old adage that what gets measured gets done. If you have set out straightforward goals and expectations to be met within a reasonable timeline, you will be able to judge for yourself if you are meeting, exceeding or falling behind your goals. On an ongoing and regular basis, review the goals you have set and if you find yourself falling behind, take corrective action before it is too late. If you ignore the initial signs of trouble, you may find that you are quickly out of business and possibly facing even greater debts than when you started.
Prepare a Budget
A budget will be an important part of your financial plan. When you are starting out, you need to sit down and prepare a detailed month-by-month budget for at least the initial 12 month period. To assist you, a sample budget spreadsheet is available at www.practicepro.ca/financesbooklet. Review the items in the expenses portion of the chart – you will find things you just didn't think of.
Your budget should include all expenses that you know of and/or can anticipate, and when they must be paid. Include an amount for unexpected expenses, since it is Murphy's Law that costs will always be greater than you expect, particularly as the volume of work increases. Build in marketing time and expenses. Most of all, build in your draw: If you don't look after yourself, no one else will. Compare the total expenses to your anticipated revenue. If you do not have a historical basis to forecast income, make an educated estimate based on your marketing plan.
Regardless of whether you just are starting out, or have been in practice for several years, take the time to create a business plan and budget for your practice. It will really help you better understand the finances of your practice and build for a more profitable future.