It happens every year. I stand in front of a group of eager law students in the seminar that I teach on law practice management, and begin the PowerPoint. In prior weeks, students have eagerly devoured the classes on social media and law firm marketing, and have joined in discussions on how to maintain good relationships with clients. But this week, as I begin to discuss law firm finances, I can see their eyes glaze over. The class lets out a collective sigh of boredom. For some reason, even though it is arguably the most important aspect of running a successful law firm, law students and young lawyers shy away from talking about money and how to make it and manage it. Law is a profession, they reason, but it is also a business, yet most young lawyers feel that they are above being mere “tradesmen.” But as a mentor once told me when I was starting out, “Don’t ever be shy about charging fees and making sure that you get paid for your time and expertise. After all, if you don’t keep your firm open, you’re not going to be able to help anyone.”
So after over three decades of trial and error, here are eight financial tips that aren’t usually included in typical law school classes. I’ve found them invaluable in making sure that my law practice continues to run profitably, which allows me to actually enjoy being a lawyer.
- Have a Business Plan. You probably have heard this one before, but its importance can’t be overstated. Even if you are a start-up solo practitioner, put together a business plan that will outline your projected growth and keep you on the right path. It will help you define your target practice areas and target market. It will recognize your competition, and calculate your monthly expenses to make sure that you don’t exceed them and spend wildly—especially when you’re starting out. The ABA has sample business plans available online for small firms. A business plan in and of itself won’t get clients for you, but it will be a perfect road map for your success. It’s something that you can refer to again and again as you navigate the early years of your career.
- Have a Personal Relationship with your Banker. When I talk with young lawyers I am amazed that many of them do all of their banking remotely. Of course it is physically easier to use an ATM or an electronic portal to deposit checks, but I think it’s a mistake. I have always made it a very important part of my practice to get to know the branch manager of my bank, and I always bring in the checks for deposit personally. Over the years, this has served me well in ways that I never could have anticipated. I guarantee that at some point something will come up where you will need your banker’s help or advice, and it makes it so much easier if he or she has a face to connect with an account number. Also, once you have a personal relationship with your banker, you will be amazed how much easier it will be to get a line of business credit—not necessarily to use, but to have on standby in case of a big case or a dry spell.
- Sign All of Your Checks Yourself. The best way to know what is going in and going out of your business is to handle the banking yourself. If you are a sole practitioner with limited staff then this is a no-brainer; but even if you run a small firm with employees, there is no better way to gauge how your practice is going than to monitor the weekly temperature of your firm and to make sure that you are on track with your monthly income and expenses. If you are not, you will catch it early and be able to make adjustments, by either increasing your hours, limiting your expenses or ramping up your marketing to increase business. The peace of mind from being in control of your finances is priceless.
- Operate Without Debt. Sometimes debt is necessary, but at least in the beginning, try to avoid it if you can. In operating a law practice, you need to remember only ONE equation, , and you should repeat it to yourself like a mantra: P = I – E. Never forget that Profit equals Income minus Expenses. Just because you got a big retainer check from a client today, doesn’t mean that you have no financial cares for the foreseeable future. Know precisely what your monthly expenses are and know how to reduce them if you need to. Always be aware of what expenses are fixed—for example office rent, phone, internet and salaries—and which are not, such as new purchases of computers and smart phones, that you can put off until you have your receivables in balance. As far as fixed expenses, assess whether your practice area can be handled virtually rather than in a bricks-and-mortar setting. This is an area where a relationship with an accountant can be very helpful. Most importantly, keep good time records even if you are working on contingent or flat fee matters. If you are billing on an hourly basis, good timekeeping will enable you to make sure that you actually get paid for the work that you do. Yet even if you are working on contingent or flat fee matters, you will have an idea of how much time you are spending on a particular case and can support your work if any disputes ever arise.
- Treat Your IOLTA Account with Reverence. This is another one that you have heard before, but is important to both your future as a business owner and a member of the bar. First of all, be sure to have a separate trust account and operating account no matter how small your firm is. Be sure to treat client deposits properly, and account for the amounts each client has paid on retainer or advance, as well as client money from settlements, real property closings or similar transactions. Balance each client’s deposits and transfers as earned to your operating account monthly, and be able to support your accounting. Never use trust account funds for personal expenses or operating expenses. If you take credit cards in your practice (and you should for numerous reasons) and those amounts are deposited into your trust account, subscribe to one of the software programs that will properly separate any credit card fees charged between your operating account and your trust account.
- Pay your Estimated Taxes. When starting out a new practice, one of the most difficult things to project is how much money you will be making over the year, and being sure that you pay your taxes on time. After a few years you will get the hang of this, but in the beginning you will be tempted to think all of the money you have brought in is yours. It’s not. At least not yet. The last thing you want is to wake up on Christmas morning and realize that you haven’t been paying enough of your estimated taxes for the year. That is another reason why it’s a good idea to work with an accountant who you trust to help shepherd you through the financial maze of starting a practice.
- Watch out for Internet Scams. You’re starting out and looking for business and you get unsolicited emails from a prospective client, usually located overseas, who wants you to do contract work for them or collect a debt. I must get three or four of these emails each week, and I routinely delete them. The prospect of work can be tempting, but please remember that if it seems too good to be true, it probably is. These scams usually involve a foreign client who sends a very real-looking certified or cashier’s check, and instructs you to deposit it in your trust account, take out your fee, and forward the rest to the client. Invariably, although your bank has provided provisional credit on depositing the check, in two weeks the check turns out to be bogus. A scam like this snagged over 80 lawyers a few years ago. Don’t fall for it. You have enough to worry about starting a new practice without falling for this scam. The ABA has also identifed several other phishing scams that often target lawyers.
- Treat Your Practice Like a Business. Always remember that your practice, whether it is virtual or physically based, is first and foremost a business. You are going to have to put in the time and effort to make it successful, and in the final analysis no financial tip or pointer can be a substitute for hard work and professional results. Remember, this is not your hobby, it is your profession, and so above all take it seriously. On that note, even though there is nothing wrong casual attire at work, and most young lawyers are comfortable in jeans and sneakers in the office, be sure to invest in at least a couple of good quality business suits that you can wear to important meetings and to court.
The foregoing list is not exhaustive, but these simple tips have always worked for me, and I’ve passed them on to my students every year. Lawyers need to be aware that finance is not just banking and billing, but is a series of personal good habits that you need to practice every day.
About the Author
Michael L. Spekter is a solo practitioner in Washington DC, specializing in representing federal employees in employment and retirement related matters. He also is an adjunct professor of law at The American University Washington College of Law and The University of Baltimore Law School, teaching law practice management.