By Elspeth Misiaszek
Published: 5 January 2012
The biggest downfall of new businesses occurs when they fail to have enough money to cover start-up costs. Start-up costs include back-up money you need until money from your actual billable hours is earned. In developing a business plan many new firms add start-up costs very quickly and these figures can be intimidating and scary. Ultimately, as long as you understand the costs of running a law firm you will be financially prepared to make it through the first few months.
First, take fixed expenses into account. Also known as overhead, these are the items you need to pay every each month. They include rent, utilities, salaries, cell phone bills, malpractice insurance, etc. These figures are updated annually as salaries change and bills increase. Be sure to perform a review of overhead at least once a year to establish opportunities to lower costs. Many law firms go so far as to negotiate what they feel are fixed expenses with the landlord and may request a lower rent if building occupancy is low due to a bad economy.
Second, make sure to record variable expenses like taxes, unemployment insurance and other expenses. If you tend to pat yourself on the back every time you’ve billed a five figure month, consider how much of that money should be directed to the Internal Revenue Service. You’ll quickly note you actually earned far less than you thought. When it comes to salaries, you may use a payroll company. Each pay day you will pay what is called ‘actual cash.’ The number is higher than what your employee earns since all the miscellaneous pay roll taxes are included. Be sure you use the ‘actual cash’ value when you calculate the costs of running a law firm.
Third, variable costs can sometimes greatly affect the costs of running a law firm. A great example is the cost per copy of renting a copy machine. Others include client lunches, temporary employees, or office supplies. These expenses can cost up to a few hundred dollars each month. Since they are money you can’t control, you should try to pick a per month average. The good news is that an increase in variable costs usually signifies an increase in business.
Finally, there are certain costs that are necessary to keep your business running, such as promotion and advertising. They are items you know you need to promote your law firm but costs you don’t consider regularly since they occur sporadically throughout the year. Continuing Legal Education is one, as are advertising costs and networking memberships. These costs recur year after year so be sure to choose a realistic yearly average. Most likely, you will have about four professional memberships to professional organizations. Count in others, including Yellow pages ads and website domain hosting, to get a true picture.
If you have been considering the costs of running your own law firm, you might have been under the assumption you can nail up a shingle and starting earning plenty of cash. For a fortunate few, who obtain the right residual clients early on, this is absolutely possible. For the rest, you will need to create a business plan that accurately captures your overhead costs and variable expenses. Be honest with yourself about assigning realistic numbers to these items in your business plan. If the numbers seem high, you will be less affected by lower realities. You will use this number to calculate how much you truly need to get started as part of the cost of running a law firm, so make sure you cover all the bases discussed in the above points.
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A law firm is a very expensive venture most people don’t realize the amount of money and time, lawyers spend trying to get it off the ground and that does not include working a case. For a plaintiff attorney the costs maybe more because they defer money until it’s settled. Law firms which are small and plaintiff attorneys who are fighting big cases for that matter any type of case should look into post settlement funding or lines of credit to help alleviate the pressure.