Opening a Practice? How to Prepare Financially

My latest Simple Steps column in Law Practice magazine is all about what are the key financial questions you need to ask before you open your own law practice.

Whether you’re starting your practice just out of law school, coming from a government or in-house background, or if you’ve worked in a firm for many years as an associate (or even a partner), you may not be as familiar with the financial operations of a law practice as you are about some other aspects of starting your firm.

There are some key questions you need to answer to position yourself and your new law firm for financial success.

You need to know your initial budget, and the categories of expenses you have to plan for, including office space, software and hardware, taxes, salaries, licenses, supplies, marketing, professional services, insurance and more.

Once you have an idea of your expenses, you’ll need to do some projections about revenue and how you’ll fund your practice initially.

Next, you’ll need to determine how you are going to charge your clients and what your billing and payment policies will be.

Will you be charging by the hour or on a flat fee? Will you require clients to pay anything up front? Will you offer payment options? What forms of payment will you accept?

You’ll also want to consider how you will communicate these payment policies to your clients.

Your billing and payment policies will have a big impact on your cash flow. For example, if you have a contingency-based practice, such as plaintiff’s personal injury work, it may be several years before you see any payment on each matter. Managing your cash flow is key to keeping your practice afloat, so you will need to determine how you will pay your expenses in the interim.

If you are taking money from clients up front or working off of a retainer, you will need to have a trust account. There are special rules and requirements for managing these accounts, and some of these rules may vary by jurisdiction. Not only will you need to ensure that your bank understands and complies with the special rules for these accounts, but you also need to ensure that your financial software properly handles these accounts. Regularly auditing these accounts and reviewing all activity thoroughly will allow you to address any concerns promptly.

Choose your financial management tools wisely. These tools can help you manage invoices, track expenses, and generate financial reports. Educate yourself about the various financial statements you need to track the financial health of your practice, including balance sheets, cash flow statements, accounts receivable reports, and more.

Ensure your chosen software program is easy to use and contains the features that fit best with your fee structure and billing and payment policies. Verify that your financial management software integrates with your practice or case management software.

Provide training for all employees who will be using or accessing these financial tools.

Determine which financial metrics you will track to monitor your firm’s financial health. Include not only revenue, expenses, profits and client acquisition costs, but also write-offs, utilization (percentage of time billed) and realization (collected versus billed) rates.

Regularly update and analyze your metrics to evaluate your firm’s progress and performance, determine where to make adjustments, and ensure that your financial strategies remain aligned with your firm’s goals.