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Oct 31, 2019


Law Firm Financial Management – Creating a Budget the First Time

Question:

I am the firm administrator for an eight attorney firm in Nashville, Tennessee. I started this position approximately six weeks ago. While I have worked in the legal field for many years as a paralegal, this is my first position as a legal administrator. I have done bookkeeping for several firms over the years. The firm has never had a budget and has asked me to prepare one for the upcoming year. I am not sure where or how to start. Any help or ideas that you may have would be appreciated.

Response: 

You will want to consider two budgets. The first will be an operating budget which is a revenue and expense budget that will contain the income and expense accounts that are listed in a profit and loss or income statement. The second will be a capital budget which will be a budget for capital expenditures that are typically listed as assets on a balance sheet such as furniture and equipment.

Here is a process that you might want to use.

Operating Budget 

  1. Print out a general ledger chart of accounts list and profit and loss statement
  2. Using the chart of accounts list (income and expense accounts only) setup an Excel spreadsheet with the following columns.
    1. Account Number
    2. Account Name
    3. Prior year actual year to date
    4. Proposed upcoming year budget
    5. Final upcoming year budget
    6. Planning notes
  3. Account number and account name columns. List all of the accounts from the profit and loss statement in the account number and account name columns.
  4. Prior year actual year to date column. Enter figures for the prior year in the prior year actual year to date column for revenue/income and expenses.
  5. Proposed upcoming year budget. Start with revenue. However, in the budget worksheet have a revenue account for each revenue producer (attorney and paralegal) – not necessarily in the general ledger but on your budget worksheet and project their billable hours/collections expected. If you are a contingency fee practice this will require an analysis of the cases in process and estimated case outcomes and timing. This is a good place to get commitment and establish realistic revenue goals for the year. You may want to have a discussion concerning this in a firm meeting. I believe that the revenue goals are the most important part of the budget and where most firms need to focus.
  6. Proposed upcoming year budget. Enter proposed expenses. You can start by examining last year’s actual figures. Give consideration to any growth (typically lawyer and staff headcount) for the upcoming year and any anticipated changes in expenses. Develop a payroll spreadsheet listing each attorney and staff members receiving W-2 pages, their compensation last year, a anticipated salary and bonus for the upcoming year, with columns for calculation of appropriate payroll taxes. Anticipate new hires during the year. Then enter in to the proposed upcoming year account columns.
  7. Planning notes. As you develop the budget note your assumptions, etc. in the planning notes section.
  8. Submit for discussion and approval. Submit the budget worksheet to your managing partner, executive committee, partnership, etc. for discussion and approval.
  9. Enter approved budget in the Final Upcoming Year Budget Column. 
  10. Enter approved budget in to the General Ledger System, QuickBooks, etc. You can now enter the approved budget into your accounting system and simply include budget on your profit or loss statement for systems that provide this function or in QuickBooks print a Budget v Actual Report with your monthly reports. When you enter the approved budget into your system you can take the quick and dirty way and enter the annual amount for each account and have the system allocate the budget equally to each month or you can allocate to each month when you anticipate the expense – for example an insurance premium for the entire year might be allocated to the specific month when the policy will come up for renewal rather than equally to each month.

Capital Budget

This is often just a simple list in a spreadsheet and manually tracked. Many of the general ledger systems only allow budgets for income and expense accounts.

Good luck with your project.

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John W. Olmstead, MBA, Ph.D, CMC

 

 


Posted at 07:34 AM in Financial Management

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