Most small businesses fail due to lackluster financial practices, the same goes for small law firms. Stay on top of these financial considerations or risk a dying firm.
The legal industry is a competitive marketplace. While there is no shortage of people in need of an attorney’s services there are also a lot of qualified lawyers. As such, setting up your small law firm can involve a variety of challenges. Few of these are likely to be insurmountable but they do require some serious focus.
One of the primary areas for your consideration has to be your approach to your finances. Keeping on top of this aspect of your business can mean the difference between struggling to break through and your ability to grow and thrive.
We’re going to take a moment to examine a few of the key financial considerations for your small law firm.
Prioritize Strong Accounting Practices
Strong accounting practices might seem like a basic need, but it is an area too many small businesses — including law firms — tend to overlook. This isn’t the same thing as bookkeeping, which is the absolute basic form of financial record maintenance all law firms must implement. Accounting, on the other hand, is the process of analyzing these financial records and using them to help your business to be more efficient and agile.
Many law firms will use a member of administrative staff to perform bookkeeping. But you need the skills of a qualified accountant to go the extra mile. The types of qualifications an accountant possesses can give you insights into what knowledge they can use to influence the financial direction of your law firm. Your attention should be directed at those holding a Certified Public Accountant (CPA) license or Certified Management Accountant (CMA) certification. The CPA is a more general accounting certification that is rigorously tested and designed to ensure holders can operate effectively in most financial scenarios. CMA holders, on the other hand, are more focused on corporate accounting. You need to hire an accountant with the most relevant knowledge base for your firm’s needs.
Build Sufficient Protections
Starting your law practice can be fraught with financial risks. While it’s important to have confidence that your firm will enjoy long-term success, it’s equally vital to understand how finances could lead to your downfall. For instance, attempting to scale up too quickly and taking on loans may see your company head toward bankruptcy.
These risks shouldn’t put you off proceeding, but they do point to the importance of setting up adequate financial protections. If you don’t work in business law or litigation you may not already be aware of how something as simple as the type of entity you choose your business to be can in itself be a form of financial protection. If you’re the only lawyer in your practice, it might be tempting to set up as a sole proprietor, but this leaves you personally liable for any debts if your company fails. A limited liability company (LLC) may be more expensive to set up, you and your partners have limited responsibility for the business’s debts and other liabilities held against it.
Remain Cognizant of Regulations
There are aspects of running a law firm that is governed by state and territorial legislation. You’re likely already familiar with those surrounding your ethical obligations and what activities your employees can and can’t perform on your behalf. However, there are also financial regulations that your small business needs to remain cognizant of.
These generally revolve around your bookkeeping obligations. This can become complicated. Particularly when, alongside your regular ingoings and outgoings, you’re holding finances in trust for a party’s future legal needs. Unfortunately, mistakes here can lead to your practice becoming subject to fines or even running into trouble in keeping your law license. You must at least take the time to review the requirements and regulations for your state and keep up to date accordingly. However, organized accounting protocols led by a professional can be instrumental in keeping on top of such issues.
Formalize Your Partnership Approach
One of the common financial considerations for small legal firms in the presence of partners. Your decision to accept new partners into your firm means that any equity needs to be split between more people. On the other hand, more owners also present the possibility of greater regular capital contributions which can be instrumental in helping you to grow the firm.
As such, you and your current partners need to develop clear protocols for how and when partnerships are offered. Formalizing qualifying criteria can be a good start here to make sure that the right people are brought on at the right time. Alongside their legal expertise, you should consider their level of income to judge their current and future ability to make capital contributions. Take time to understand their operating ethics to establish whether their behavior may result in financial disruption for the firm.
Invest in Your Staff
Your small law firm may be driven by your expertise but it will thrive by the quality of your support staff. One of your key financial considerations, therefore, needs to be how you invest in your staff. This shouldn’t just revolve around budgeting for higher salaries. It also has to include the elements that help your staff to remain healthy, gain job satisfaction, and know that you value them.
As such, you need to consider investing in a comprehensive benefits package for workers that includes more than basic health coverage. The elements that tend to result in retention and productivity include paid time off, paid parental leave, and contributions to a retirement plan. It’s also important to invest in their professional development, so your ongoing budgeting should also take into account how you can support your workers to gain training and qualifications. While these all represent financial outlays to your business, they also have the potential to have a positive impact on your success.
Conclusion
Starting a small law firm can be an exciting process. However, there are some financial issues you need to bear in mind along the way. Establishing strong accounting standards can help influence the direction of your business, while awareness of regulations and your entity choice can serve to protect your firm. Alongside a protocol on offering partnerships and investing in your workers, these steps can help make sure your practice is set up to thrive.
