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Budgeting (Exactly What Does That Mean?)

August 09, 2017
Budgeting (Exactly What Does That Mean?) - blog post image

Most firm (business) owners begin to think about how their business has performed for the year and also begin thinking about how to improve upon that performance for the next calendar year around November. Without a target to measure against, performance is usually simply measured against how the firm did last year. Although better than no measuring stick at all, “better than last year” is not the optimum standard for which to gauge financial performance.

Ok…what is the optimum? Answer: a well prepared budget of expenses and a projection of expected revenue compared to actual performance. In other words, “What did we think would happen and what actually happened?” It is also at this time that we should be asking “What do we think will happen next year?”

Before we go further, let’s define, for purposes of this article, the word budget. (By the way, my wife’s only definition of it is that it is a rent-a-car company.) Budget is only meant to mean “what we expect to happen, given the circumstances as we know them today.” It does not mean that a certain amount of money is “set aside” to be spent on certain line items or groups of expenses and we will spend no more. As we all know, situations change and plans need to be somewhat flexible as the circumstances dictate.

So, how does one construct a budget of expenses? There are a myriad of different approaches, but the most simple is to actually begin with last year’s line item expenses analyzed on a monthly basis...then ask those “in the know” or those responsible for the spending decisions what they expect for the upcoming year, on a monthly basis, and why they expect “that” amount. This approach will create a valuable thought process and discussion. Each month a budget to actual analysis should be produced with all material variances scrutinized. If there is good reason for the variance….then great….no issue. But if we don’t know why there is a variance, the reason should be investigated and resolved. This is financial expense management 101.

Often we hear that in a plaintiff firm revenue projections are “impossible.” Untrue….they may be less accurate to predict… but not impossible. We go by the adage that if you aim at nothing, you hit it with amazing accuracy! We should set reasonable goals. You know, or should know, what cases are in inventory, your average case fee, and your time on desk. (If you don’t know these things, it is time for another conversation!) Armed with this information, reasonable expectation of revenues should be possible. You may also find that this information can be shared with individual attorneys so that they will have individual targets based on their case loads. We have found that the conversations that these projections provoke are valuable in themselves.

This goes without saying…but I am going to say it anyway! Even though we are attempting to predict the future for the firm financially….ultimate case handling (settlement, trial, etc.) must be dictated by what is best for the client. Never, should a case be resolved to “hit” financial objectives of the law firm.

By spending the time to create an “as accurate as possible” expense budget and revenue projection, profitability targets can be established. A review of “how we did last year” according to our plan and “what does next year’s plan look like” are the basis of a sound financial review and planning process.

It has been our experience that the firms that follow this process get better at it year after year and the budget to actual variances are rarely surprises. The work put into the monthly and annual budget to actual comparisons and the annual budget/projection exercise, substantially reduce the stress of simply not knowing where the firm stands at any given time….thus improving the quality of life for the stakeholders of the firm.

And that is what it is really all about, isn’t it?

Richard Harris
"After founding and managing one of Nevada’s largest personal injury law firms for over 30 years, and teaching law practice management, I didn’t think there was much a consultant could do for me. I initially asked Vista, “Why would I pay you to tell me what’s wrong with my firm – when I already know it?” Their response was, “We’ll help you fix it.” That had actually never occurred to me, which showed how much I needed them. Beginning with the onsite visit and comprehensive Needs Assessment, the Vista team not only helped fix what I already knew needed attention, I’m pleased to admit they revealed and helped us resolve several problem areas I previously didn’t know about. Not only that, through consistent coaching conferences and initiation of dynamic reporting of key performance indicators, Vista trained and transitioned a new management team to take our firm to the next level. I’m completely satisfied with Vista and recommend their services to any firm, large or small."
- Richard Harris
 Gary O. Bruce
"Within a short time of working with the Vista team, the main accomplishment – one that I did not anticipate – was to find a way to ensure the things I valued were actually being done by my team. We have become a firm driven by client service, and the Vista dashboard reports and other tools merely help us achieve those goals. It’s hard to do all of the above without a plan, and Vista has worked directly with my internal team to not only come up with a right-fit plan, but also helped us implement that plan successfully."
- Gary O. Bruce
David Miller
Vista's core team is a tripod of experts helping to shape me into a better Managing Attorney. They do it without fear and with so much grace, humility, and patience! And they throw a great party after the hard work all day! #OurConsultantsAreBetterThanYours #Guaranteed
- David Miller / Managing Attorney