Edward Gibbon once said: “I am indeed rich, since my income is superior to my expenses, and my expense is equal to my wishes.”
In our prior posts we have looked at income projections from a couple of different perspectives. This third post in our Cash Flow series starts to look at expenses in a bit more detail.
You can have billings (and fee collections) that exceed your wildest dreams, but if your expenses exceed your fee collections, you will be in financial trouble.
Accordingly, our tip this week is as follows:
#3 – Compare your Actual versus your Budgeted Costs:
What are your actual expenses compared to your budget? This will tell you whether you are managing to run your office within the financial constraints that you anticipated.
If your costs are high compared to your budgeted amounts, then you must cut other costs to compensate, or increase your collected billings in order to have a balanced income statement. For immediate impact, look at controlling your costs before trying to increase your income, as cost cuts take effect immediately, but income is subject to the collection ‘lag.’ This is often difficult, however, because salaries and real estate/rental costs are usually a firm’s largest expenses, and they are difficult to cut quickly.
In fact for most law practices the actual amount of expenses that can be cut quickly are often quite small in comparison to the overall budget. This is partly due to the fact that a law office must enter into long-term commitments such as rent (for office space, copiers and other equipment), communication expenses (internet, cellular and telephone), salaries and the like in order to stay in business. In our experience, law firms delay paying existing expenses if things get tough. However, that will result in longer-term damage to your reputation if it continues.
If your actual costs are higher than your budgeted amounts, you need to do some investigative work. Are your expenses higher due to increased client disbursements? If so, perhaps you can bill out the disbursements and/or ask for retainer funds to be able to cover these expenses. Are office overhead costs higher than anticipated? If so, where can you reduce your expenses? Can you bring in another lawyer to help share expenses? While we advocate cutting staff only as a last-ditch step, can you move to using contract employees that you only pay for when you need them?
When it comes to cash flow, managing your expenses can be just as important as managing your work.