Starting your own law firm is similar in many ways to starting any business. You already have the law stuff: You’ve been to law school. You’re a good lawyer. You have clients who will stay with you. That’s the law stuff.
But what about the business side? A basic understanding of how to use financial information to make decisions for your firm is essential. But don’t worry, you don’t need another degree. You do however, need enough financial knowledge to ensure your law firm prospers and continues to serve the clients who depend on you.
Whether the funds to start your firm are from savings, relatives, a bank loan or credit cards, you need a business plan.
The Four Parts of a Basic Business Plan
- What are you going to do?
- How are you going to do it?
- Who is going to do it?
- How will you make an adequate profit?
The first three parts are about the operations of the firm and will feed numbers into the fourth part. For example, “My firm is going to provide real estate legal services, in the Northbrook neighborhood, through a single office staffed by me and two associates.” Obviously, much more detail would go into the actual plan.
As for “How will you make an adequate profit?,” the answer is based on the three core financial statements: cash flow, profit and loss and balance sheet—plus a handful of ratios calculated from these statements. This requires having pro forma financial statements that include all major assumptions about the new firm tied to the statements as variables so that you can do “what-if” analyses. Excel spreadsheet templates are available from many sources and a basic accounting program like QuickBooks can be used to generate forecasts.
Rough Guesses Are Not Good Enough
As a prospective entrepreneur, as you plan for your new firm you should be able to run multiple forecasting scenarios on crucial inputs like billable hourly rates, annual billable time expectations, realization rates and number of clients. For example: “What happens if I bill half that much … ?”
With a forecasting spreadsheet you can identify best- and worst-case scenarios and the crucial factors in achieving adequate profitability. The sensitivity of your new firm to specific factors will also become clear as you go through this process. This simple business planning process will go a long way toward ensuring a successful firm.
John Dolan-Heitlinger is a Principal at the Institute for Finance and Entrepreneurship. He is a nationally known CEO, consultant and speaker and the author of the book Finance Without Fear: A Guide to Creating and Managing a Profitable Business www.financewithoutfear.com. He teaches college courses focused on current and prospective entrepreneurs and business owners and has an MBA from the Johnson School at Cornell University.