Budgeting From the Bottom

Budgeting And Goal Setting Shouldn’t Always Begin With Revenue.

Take Control Over Your Budget And Achieve Your Law Firm’s Goals

We’re at the time of year where everyone is planning and setting goals. It’s all you’ve read about on social media. There’s inspirational quotes on setting goals everywhere. Is it me, or is it all the rage this year?

Don’t get me wrong, goal setting is great. You can’t reach a goal without first setting it. Plus, how would you know you’ve reached your definition of success if you haven’t first defined what success looks like since it’s different for each of us.

But my question is… are you tying your goals to your finances?

Better yet, are your finances organized enough to track your goals?

Many Law Firm Owners Forget The Part That Financials Play In Goal Setting. Or Maybe They’ve Never Had Someone Help Them See How To Set Better, Measurable Goals.

I was recently working with a solo law firm. One of their goals was to increase net income by $50,000.

Here’s how we determined what needed to happen to reach that goal:

First, the financials from the previous year must be in order and accurate. I worked with this law firm throughout the year making sure their accounting was up-to-date on an on-going basis so we knew the financials we were looking at were correct (Side note…If your financials aren’t there yet, I’d love to chat with you and get you caught up).

This is where budgeting from the bottom is different than traditional budgeting you’ve probably done (or not, that’s okay too). We took the previous year’s net income and added $50,000 to the bottom line.

Then we determined what costs they would have for the upcoming year.  This wasn’t too hard because most costs in a law firm are predictable, but at this point you have to think about what you need to spend to increase revenue (marketing, staff, office space, etc).

Now we had the projected bottom line and the expenses.  This forces the top line revenue. Remember, your Profit & Loss is Revenue – Expenses = Net Income. Revenue is the number you’re after. We knew what net income they wanted. We determined what the expenses would be. So revenue is the force amount.

What Your New Budget Tells You Is What You Need To Bring In And What You Can Spend In Order To Hit Your Bottom Line Goal. That’s Goal Setting With Your Financials!

Now is where we were able to set KPIs for the law firm.

We determined revenue must be $400,000 for the firm to reach their goal. We looked at the average value brought in by each client (or by matter if your clients have multiple matters in a year). The average client was $10,000, therefore they needed 40 clients. Divide that by 12 months (assuming a consistent year), and we’ve now determined they need at least 4 new clients per month and they will be on target to reach their ultimate net income goal.

With this firm we worked our way from the bottom up. Not top down. That is the easiest most reliable way to set a budget when you have a target net income.

The key to this was having accurate financials. If you don’t have a handle on your legal accounting and financials it can be hard to measure anything. We’ve found many times that law firm owners feel shameful or embarrassed when their accounting is a mess or non-existent, so they ignore it. But there is no reason to feel that way! That’s what we are here for. It’s what we do everyday. And this is a no judgement zone! The sooner we get your financials on track the sooner we can set clear, measurable, and attainable goals with you. Plus you’ll sleep better knowing it’s taken care of.

If you’d like to read more about how accounting and goal setting can help you, check out these other blog posts: Understanding Your Financials and Measure What Matters.

Aligned CPA helps solo and small law firms. We’d love a chance to talk and see if we would be a good fit for your firm. Contact us for a consultation today.