Getting your financials in a row

Listen to this article

Big law firms have staff to handle the budgeting process, but solos and small firms have to do at least part of it themselves. Now is a good time to assess how you’re doing financially and plan for the coming year, and not just for tax purposes.

“For somebody to go into a solo or small-firm practice requires them to be astute as a business professional,” said Judith Rush, a former solo practitioner and co-instructor of the small-firm practice class at the University of St. Thomas School of Law in Minneapolis. Rush recommends using the business plan as “a living document” and doing financial and business planning on an ongoing basis.

“That way you have a really good awareness of where you are, and if you decide you want to bring on a partner, for example, or go the other direction, you always know what you look like, how sound you are financially,” Rush said.

Barbara Weckman Brekke of the six-year-old firm Brekke, Clyborne & Ribich LLC in Shakopee meets with her partners monthly to discuss their budget.

“We set a fairly detailed budget of all our expenses, everything from the facility, rent, phone, Internet, CLEs, library, licenses, membership dues, printing, office supplies, insurance — we probably have at least 20 categories,” said Brekke, a former economics instructor. “I think there’s a tendency to think that if you’re on your own or you’re small, you don’t have to be so specific. In the beginning, we watched every dollar that went out the door. It would be easy to get into the practice of law and turn everything over to your accountant.”

Brekke and her partners have chosen to be careful about budgeting so they can have flexibility and keep their business going. Partner Johanna Clyborne is a lieutenant colonel in the Minnesota National Guard who spent two years in Iraq after the firm was formed. Partner Rebecca Ribich also chose to take one summer off to be with her children.

They use QuickBooks to keep track of income and expenses and to print out a monthly report. And they have an accountant. “We think it’s good to have an outside eye take a look at your business and your situation once a year, give suggestions and look for trends, because they may be seeing them with other clients,” Brekke said.

Christopher Wheaton of Barry, Slade & Wheaton in Minneapolis breaks it down into simpler terms. “I don’t look at my inflows. I look at my outflows, where am I spending money and see where I can cut in the coming year,” he said. “Mostly what I am talking about at this point is advertising. For most solos, that is their biggest expense out of the gate.”

A specialist in federal consumer rights litigation, Wheaton also decided to give his filing and process-serving expenses a second look. Mid-year, he switched providers and has saved money.

Rush suggested finding an accountant who specializes in dealing with law firms. Members of the Minnesota State Bar Association can go on its listserv and ask for recommendations.

Dudley Ryan, a tax partner at Clifton Larson Allen, an accounting firm that serves several law firms, is also a lawyer. Ryan had given CLEs on finances for law firms and suggested several areas for lawyers to consider when setting and reviewing their budgets:

• Make up financial statements on an accrual basis as well as on a cash basis. A cash statement is good for tax purposes and recognizes when money comes in and goes out but doesn’t really reflect the financial state of the law firm, Ryan said. Doing the books on an accrual basis recognizes income when it’s earned and expenses when they’re incurred rather than when they’re paid.

• Take a look at your troublesome receivables: How long have they been outstanding and to whom are they owed? If there’s a concentration to one or a small number of clients, it deserves a closer look. “That’s a really big one for law firms,” Ryan said.

• Review collection, overhead and profitability by attorney for the year.

• Take a look at nonowner salary costs for staff members and others involved in the firm.

“All of that really goes into hopefully setting the budget for next year,” Ryan said. “Right now they should be well into the budgeting process for 2012.”