Running Your Firm Off Your Bank Balance

Most boutique firm owners I talk to manage their firm's finances the same way.

They look at the bank account. If there's money in there, and it's been building up over a few months, they feel good. The firm must be profitable. If it's tight, they feel the pressure and start stressing.

That's it. That's the whole system. The bank balance and a gut feel.

And look, I get why. You're flat out doing the actual work. Nobody started a law firm because they love management accounts. But here's the problem with running on gut feel. You have no levers. When a real decision lands in front of you, you've got nothing to pull on.

The decision that keeps you up

You know the decision I mean. Do I make this hire. Can I bring on a contractor. Should I sign up to that practice management software, or the new document system, or another precedent library. Every one of those costs money every single month, and every one of them gives you that same knot in the stomach. The last two or three months were fine, but what if a bad month comes. What if the work dries up for a quarter. You don't actually know, so you sit on the decision, or you make it and then quietly worry about it for months.

Where it goes wrong

I've watched where this goes wrong. An owner makes a hire based on a rough assumption about how many clients and how many billables will come in. They never write the assumption down, so they never notice when it stops being true. Then there's a cash flow hole to cover every month. They start topping it up from their own savings, or leaning on the overdraft. Their personal income starts to peak and trough. The stress builds. It comes out on the team. The team gets pushed harder, everyone tightens up, and good people start to leave.

None of that is a work problem. It's a visibility problem.

The shift

Here's the shift I want you to make. You do not need to become an accountant. You need one thing written down on a page, in plain numbers. Your revenue, your salary costs, and your overheads. The typical law firm stuff. Rent, insurance, your subscriptions to CCH and Thomson Reuters, practice management, document management, the precedent libraries, the licensing fees. Most of that barely moves month to month, which makes it far easier to pin down than people expect.

Once that's on a page, it stops being a gut feel and becomes a control panel. Now you have levers. You can see what a typical month actually looks like. You can model the hire before you make it. You can ask a real question instead of a worried one. Under a quieter scenario, this hire needs five more matters a month at my average fee. That's a plan. That's something you can go and act on.

That page is what I call a normalized budget, and it's the single most useful thing I help firm owners build.

What's coming

Over the next few weeks I'm going to walk you through building your own, one step at a time. We'll start by reading your last twelve months properly, so you understand why the big months were big and why the slow months were slow. Then we'll build out your revenue scenarios, nail down your true cost base, and get to the number that actually matters, which is what drops through to you.

By the end you'll have a page that turns every big spending decision from a gamble into a calculation.

For now, one small thing this week. Pull up your billings for the last twelve months and just look at them month by month. Don't analyse anything yet. Just notice the shape.

If you want, I'm putting together a simple template you can drop your own numbers into. Reply to this email with the word "template" and if enough of you want it, I'll build it and send it out free.

More next Tuesday,

Gordon