When I started my firm, it was with a $30,000 loan from a local nonprofit. It was enough to get the firm up and running, and I was fiscally conservative enough to pay it off early. You have options when it comes to financing your firm. Some people use lines of credit, some use credit cards, some borrow from family, friends, or banks, and some use personal savings. You will likely need capital to get off the ground as well as access to money on an ongoing basis for emergencies, opportunities, and slow months.
Cash Flow
Like everything else, business is cyclical. Growth is never constant or linear. There are periods of time when things are going very well and slow months that follow. Most of us fall into the trap of marketing like crazy, getting more work than we can do, dropping marketing, and feeling the pain of no new clients. It’s an uncomfortable roller coaster, so you must manage cash flow.
Figure out a system for saving money. You will owe the IRS money. You will have months where your expenses exceed your income. Pay yourself first, set up a savings account, or have a bookkeeper move 20 percent of revenue each month— just do something to set yourself up for managing cash flow. Also, by having available credit cards or a line of credit, you build in a safety net.
Cash flow statements should be viewed each month. If you are only looking at profit, you may not be paying close enough attention to the dollars you are taking out in distributions. By looking at monthly cash flow, you can ensure you are not draining your reserves when you decide to remodel your kitchen or invest in the latest technology.
Billing
Bill your clients early and often. Our firm has experimented with once vs twice monthly billing and determined that for us, billing twice a month makes for happier clients and higher bank balances. Your bills are another way to communicate with clients, and frequent billing gives you an ability to see problems and head them off.
Communicate with your clients about unpaid bills in a proactive and respectful manner. Most often, I ask people if the services are still within their budgets and, if they are not, whether we can move into a more consultative role. This non-adversarial but honest approach leads to peaceful outcomes with clients and lower accounts receivable.
We also happily make payment arrangements with those who have fallen behind. Most often, clients are happy to pay when they have been treated fairly and honestly.
Expenses As a Piece of the Pie
I like to think of total revenue as the “pie.” All your expenses are various slices of the pie. The three largest slices can be cut into smaller pieces. For me, I like to aim for 50 percent of gross revenue to be spent on employees and related employee costs, 30 percent on marketing and other overhead, and 20 percent profit.
Once I am generally in this range, then I can dig in to make sure I am spending enough money on marketing and that my fixed offices expenses are not creeping up to overtake the slice.
Part of this exercise is determining what you consider profit. For me, it is money left over after everyone and everything has been paid, including my payroll for work as an attorney, plus any personal expenses that have been run through the business. Other people take total compensation as profit and do not remove money for the cost of replacing yourself as an attorney. I do not think there is a right or wrong answer, but you will need to be intentional and consistent when determining what you want your pie to look like.
Managing Expenses
I like to think of expenses in the following categories:
- Employee Costs
- Fixed Office Costs
- Marketing
- Other discretionary or non -recurring expenses
Employee costs include employee payroll, equipment and training, taxes, benefits, bar dues, software subscriptions, cell phones, etc. If the cost can be tied to an employee, it goes in this bucket.
Fixed office costs are rent, copier, bank charges, insurance, telephones, accounting, interest for any loans or credit card debts, etc. These are costs that cannot be tied directly to an employee and are necessary for your operations. This will not necessarily be the same for every firm.
Marketing costs include any costs associated with business development, bringing in leads, thanking your clients or referral sources, collateral materials you have produced, digital marketing, pay-per-click, design services, search engine optimization, money you pay to AVVO or for those awards that come in the mail, costs for brochures, books, editors, writers, etc.
For me, marketing is a broad bucket of business development, and I make a point to spend between 7 and 10 percent on these activities.
The “other” category is things like my car, office meals that are not related to business development but are for internal activities, the cost of outsourced labor projects that are not related to employees, training, and travel. This category is the catch-all for everything that doesn’t fit in the other three.
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