Having a healthy, profitable law firm is no easy feat. You have to keep an eye on the bottom line and plan for any unexpected expenses that come with running a business. But sometimes it’s not so clear how to do that, especially when you’re just starting or dealing with a cash flow crisis. Here are some tips for keeping your law firm finances in check.
Know what your firm is worth
Knowing what your firm is worth can help you plan for the future. If you understand the value of your business and have a realistic idea of how much it’s worth, you’ll be able to make smarter decisions about pricing and service offerings. This will allow you to better position yourself in the marketplace and not oversell yourself or your services.
Have a system for keeping track of tax time
One of the biggest challenges when managing a law firm is staying on top of all of your finances. It’s easy to forget about some costs and expenses, and it can be hard to keep track of everything at once. Here is how you can keep your financial records organized:
Keep track of expenses: You need to know where every dollar goes to stick within a budget, so it’s important to have an organized system for tracking expenses. Whether you use Excel spreadsheets or a dedicated software program like QuickBooks, just make sure that you’re recording all purchases and payments regularly so that they don’t slip through the cracks later on.
Keep track of income and payroll taxes owed: At tax time, it helps immensely if you’ve got a list handy with all relevant information—including employee pay stubs or pay stubs from contractors who work with your firm regularly—so that nothing slips through the cracks when calculating taxes owed or paid out incorrectly due to mistakes made earlier on.
Keep an eye on cash flow, not just revenue
So, you’re running a successful law firm. You have a healthy revenue and a good profit margin. But is it enough to pay the bills and stay in business? Cash flow is the lifeblood of any business—especially when it comes to being able to meet your financial obligations and ultimately pay your employees. If you get caught up in focusing only on revenue, without keeping an eye on cash flow as well, that can be dangerous for your company’s future.
For example: Imagine that a client has sued your law firm because they lost money after hiring you as his defense attorney. The case goes to trial; you win the case and collect $1 million in damages from him as well as another $200,000 from his insurance company, which also wins its lawsuit against him. This means that at first glance—looking only at profits—your firm made $1.2 million over two months.
But now look at what happened during those two months: Your firm had already spent about half of those dollars before collecting them back through legal settlements; meanwhile, other expenses were still coming due even though no new revenue was coming into the business account yet because there were no billable hours generated during this period either.
Know what you’re doing with any new money coming in
You should know what you’re doing with any new money coming in. Talk to a financial planner or accountant and make sure you’re making the right moves with your cash flow. If you don’t have an expert keeping an eye on things, the best advice is to not let the money sit in a bank account. Instead, use it to pay down debt or invest it so you can grow your business even faster.
Diversify your practice
Don’t put all your eggs in one basket, and don’t be afraid to try new things. For example, if you have a criminal law practice that’s taking off, it might be time to branch out into divorce or real estate law. If you’re a civil trial lawyer who has built up an impressive personal injury business, consider expanding into family law and vice versa.
Ask for help when needed—and don’t be afraid to say no. Asking for help or referrals from colleagues and friends will not only expand your network of potential clients but also give you access to valuable insights about how to handle certain cases more effectively—and save money on marketing efforts in the process. Just remember: You are still responsible for practicing with integrity and maintaining the highest ethical standards possible; anyone with whom you consult should know this before giving advice or making referrals on their behalf.
If you follow these five tips, your law firm will be in good shape. You’ll know how much money is coming in and where it’s going, and you’ll have a system for dealing with taxes. Your practice will be diversified and you’ll have a plan for any new funds that come into the business.