A lot of LPM posts don’t touch on the nitty-gritty aspect of finances all that much. Quite often the financial aspect of running a practice is the 800 lb. gorilla in the room that everybody ignores to talk about cool things like cloud computing or virtual offices. No wonder; talking about money means talking about accounting and math — two subjects that we thought we avoided when we went to law school.
Robert Kiyosaki may not have coined this phrase but he said that what makes people rich is not how much money they make, but how much they keep. You cannot measure how much money you’re keeping unless you understand how to read an income statement. They aren’t very difficult, and your word processing or spreadsheet program likely has an income statement template. There are a ton of examples on line, as well. You don’t need anything complicated, just enough to measure how much money you have coming in, what it’s being spent on, and what you will have left over. Like David said, cash flow is king.
Your income statements will also help you project your finances to let you know what you need to bring in to stay afloat. If you are yet to strike out on your own, then making your first income statement is a must. You will use it to forecast what you need to spend to start up and what you need to bring in to be successful. If you are already practicing and have never used an income statement, better late than never.
I chose to craft my own version of a basic income statement to measure what my first year as a solo would need to look like in order for me to be successful. In other words, I tried to predict what my cash flow would need to look like. First, I added my expenses into 3 categories:
- Annual recurring expenses
- Monthly recurring expenses
- One-time expenses
My annual expenses included malpractice insurance (I made an educated guess), bar dues, etc.; my monthly recurring expenses included rent, internet, phone bills, etc.; and my one-time expenses included things like a scanner and new cell phone. I also made sure to budget a “cushion” into my expenses, too, since I knew I was forgetting something. (The “cushion” also can account for stationery, unanticipated software or other costs that might be difficult to determine at this point)
After I created those three groups, I multiplied my monthly expenses by 12 to arrive at their yearly totals, then added that amount to the annual and one time expenses. Then I knew what my annual expenses would look like for my first year as a solo.
Turns out my first year costs will run around $10,000 – $13,000 with some bells and whistles that I could cut out if I needed. It sounds like a lot of money, and it would be if I had to lay out that cash all at once. But I realized that my monthly expenses were only around $700 (including a downtown office at approximately $200/month), my one-time expenses were around $1,000 and my annual expenses were around $1,500. That meant that upon starting up my practice I would need an initial investment of just over $3,000.
Next, I determined what I would charge for my services. I’m wary about advertising my fee at this point (or ever, since each case is different and requires its own analysis of what fee is reasonable), but since he already put his figures out there, we’ll use Daniel Chetson as an example. Daniel was featured in this article titled “Law Grads Going Solo and Loving It.” He claims to start charging around $2,000 for a DUI, $1,000 for a misdemeanor and $2,000 for a felony. You may charge differently for different services but it provides a nice jumping off point for our analysis.
The math there is not terribly difficult. Even if you cut his fees in half to adjust for cost of living, that puts the fee at $500 for a misdemeanor case and $1,000 for a DUI or felony. If my monthly expenses are approximately $700, then I have covered them with only a single DUI case or two misdemeanor cases. I would need three DUI cases to make back my initial $3,000 investment. Over the course of 30 days I would need to get a single client to cover my monthly expenses. If I got a new DUI client every week I almost make my monthly expense seven times over. Let that sink in. Cash flow is king.
You can do it on a billable hour model, too. Begin by determining your target gross revenue, say $75,000. Then determine the number of days you want to work during the year, accounting for holidays, vacations and weekends. For this example we’ll use a round number like 200. Simply divide $75,000 by 200 to determine what you need to make a day to meet your target. The math works out to $375 per day. If you bill at $100/hour then you need to bill 3.75 hours a day for a little over half of the days of the year to gross $75,000. Let that sink in.
I’m aware that not every cent of every fee goes right into your pocket as some might go towards things like filing fees, investigator costs, court reporters, experts or things like that. However, you may charge for those costs separately. If those costs are included, then they might be built into an adjusted fee. The options are only limited by your state’s ethics rules.
I’m also aware that this post doesn’t mention taxes. I’m not an accountant and don’t pretend to be one. For this brief analysis I just didn’t think it made much sense to get that technical. This post is simply meant to show that you can do this.
Ignoring the financial aspect of running a practice is a terrible idea not only because it will cause your business to fail but also because you will never realize how easy it can be to succeed. Embrace your inner number cruncher to be the best lawyer and entrepreneur you can be.