Tax Time Tips
Essential Financial Management for Lawyer Entrepreneurs
If you are an attorney in your own firm, you have made the leap — you are an entrepreneur. You probably started your firm because you wanted that feeling of autonomy and control — you wanted to call the shots. But how much control do you really have?
When a client calls, you have to answer. When you start a new marketing campaign, you have to wait for results. And when the calendar says it’s tax time, you have to collect your numbers and get your papers ready.
Taking Control of Your Business: The Three-Legged Stool
If you are like most attorney entrepreneurs, you make most decisions reactively. Instead of running your business, your business runs you. Like so many other things, tax season is something that just happens to you — something painful you just hope to survive.
If you’re constantly scrapping to keep up, it’s time to take a deep breath. It can get better and you can take control, even with taxes. But first you need a working system for managing your finances — all year-round.
Michael Downey, author of “Introduction to Law Firm Practice,“ says a law practice is like a three-legged stool. Each leg is equally important, so if any one leg is neglected it could collapse the whole thing. The three legs are:
- Law practice management
- Financial management
You have to be a good lawyer and serve your clients. You have to market to keep clients coming. And you have to bring in enough money to survive. (Of course, the latter includes the documentation to stay within ethical boundaries and file tax returns.)
Most attorneys invest in two of the three legs, but neglect the financial leg. And that’s why they’re never in control at tax season.
The Financial Leg: Owning Your Practice’s Finances
In one of my favorite books, “Essentialism: The Disciplined Pursuit of Less,” author Greg McKeown says: “Essentialism is not about how to get more things done; it’s about how to get the right things done. It doesn’t mean just doing less for the sake of less either. It is about making the wisest possible investment of your time and energy in order to operate at our highest point of contribution by doing only what is essential.”
When you started your firm, you wanted autonomy and more time. You wanted to be able to invest in things you cared about and serve your clients well.
So when you look at the financial leg of the stool, the question isn’t, “How much is enough to cover my financial needs for a year?” The question is, “What type of financial system will help me understand how to steer my firm toward profitability, invest in only meaningful activity and give me more control over my time?”
This is what it looks like to be in control of your finances:
- You look forward, not backward. Rather than having your CPA sort through documents at the end of the year, and then looking back to see what happened, you should have a real-time, forward-looking view of your financials and business.
- You collaborate year-round. Being in control does not mean you’re an accounting expert. Even the most financially savvy law firm owners lean on experts to fill in knowledge gaps. Rather than working with an expert once a year in an expensive, painful tax process, you should develop an ongoing relationship with someone who can help you understand what you are seeing.
- You make informed decisions. Which marketing efforts are working and which are not? Can you afford to hire someone? Can you afford to take six weeks of vacation? When you have a healthy, forward-looking system for managing your finances, you can make better decisions. Best of all, you can be proactive — decide what you want, and then look at your numbers to decide how to get there.
Getting Down to Essentials
So, what is essential to you when it comes to your practice’s finances? What is your highest point of contribution?
If “survival” is your goal, then grab your shoebox and struggle through the tax season like everyone else. If your goal is to drive your business in a meaningful way, it’s time to get serious about the financial leg of your stool.
There may be no avoiding the pain of tax time this year, but you can use the pain as motivation to create a better financial system so next year all will go more smoothly, with much less pain.
Micky Deming is the director of marketing at Kahuna Accounting, connecting attorneys across the country with Kahuna’s bookkeeping solutions. He is a journalism graduate and more of his writings can be found on the Kahuna Accounting blog. Follow him on Twitter @mickydeming.