The 5 Steps To Creating A Business Budget
The idea of creating a budget may feel overwhelming, especially if you’ve already been in business for several years. However, most firms will find the initial time and effort required to create a proper budget is well worth the decision-making guidance it provides throughout the year. Whether you decide to do it yourself or work with a financial professional, it is important to understand the basic process and required information to get started. Here is an overview of the five-step process of budget creation.
Budget Basics: Revenue, Expenses, Profit
A law firm budget is an essential part of your business strategy that estimates
Revenue - Money received by the firm
Expenses - Money spent by the firm
Profit - Money left over (Revenue - Expenses)
Revenue and expenses are normally broken down into various subcategories, often referred to by your accountant or bookkeeper as part of your “chart of accounts.” A law firm chart of accounts, such as the one offered to Firm Numbers clients, organizes revenue and expenses to help determine drivers of profitability and identify growth opportunities. Your budget should include the amount you expect to receive (revenue) and pay out (expenses) in each of these categories for each month of the year.
Law Firm Budgeting While in Startup Mode
Startup law firms may not yet have an established accounting system (Quickbooks, etc.) with a formal chart of accounts to organize revenue and expenses. If this is the case, we recommend making your own list of revenue and expense categories as it relates to your firm. The budget you create, no matter how informal, can provide a crucial framework for business decisions at any stage, regardless of profitability.
Step One - List your revenue and expense categories
Start your own budget by vertically listing all your revenue and expense categories in a spreadsheet. You can pull these from prior income statements (aka statements of profit and loss), your accounting software, or your own estimated list.
Next to the list of categories, horizontally list each month of the year in order to break down each category by month.
Step Two - Conduct research and gather historical data
There are several strategies to make an educated guess on how much you will earn and spend each month. For established firms, the first place to start is the statement of profit and loss from the prior year. Bank and credit card statements will also provide a record of financial activity. You may also want to research industry benchmarks and/or consult with an accounting professional. Newer firms may also seek feedback from their peers via online forums and industry networking.
Step Three - Estimate monthly revenue and other income sources
Categories of revenue for established practices may include hourly earnings, flat fees, consultation, referral fees, and more. It is important to consider other sources of income that support your firm such as personal savings, credit cards, or bank loans. For new attorneys, these income sources will be a critical component to supporting business activities. Remember to be careful with your math and remain conservative.
Step Four - Estimate your monthly expenses
Your monthly outflows of cash may occur regularly (fixed) or scale up or down depending on business activity and other factors (variable).
Fixed Expenses
Items such as internet, fees, software, bank fees, mobile phone service, website hosting, etc. are generally easy to predict. Take stock of everything you need to run your business each day and decide which of these things are fixed costs you must pay for each month.
Variable Costs & One-Time Spending
Variable and infrequent costs fluctuate throughout the year making it more challenging to estimate each month. Examples include transportation, events, postage, marketing, taxes, CLE credit, etc. It is important to plan ahead and make sure there is cash set aside for anything you want or need to buy for your firm throughout the year. The actual timing of these outflows is less important and are more likely to differ from your budget.
Step Five - Add in some cushion
A more conservative budget will set realistic profit expectations and reduce the stress of missing your numbers. Slight modifications to your estimates can provide a needed cushion to tolerate unexpected events. To build this in, increase your expenses five-to-ten percent and reduce revenue and income numbers by the same proportion.
Like any business strategy, budgeting is only as effective as your commitment to putting it into action. Accurate and consistent bookkeeping provides a solid foundation and dramatically reduces creation time. It is also critical to schedule regular times to revisit and revise your budget throughout the year. A monthly budget variance report, comparing your actual versus budgeted numbers, is highly recommended and is a standard offering to all Firm Numbers clients. For additional guidance, contact our accounting professionals or subscribe to our newsletter for ongoing tips and financial best practices.
Firm Numbers is dedicated to helping pull entrepreneurs out of decision-making based on emotion and get the necessary data to objectively run their business. Book a free consultation online to find out how our bookkeeping and accounting packages can help you be the boss, not the bookkeeper.
