Law firms can use tax time to confront their real numbers — and adjust this year’s income and outgo projections.
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How is that tax filing going? Have you rounded up all your information for a timely filing — or maybe you’re filing for an extension? As we make sure to gather and sort every deductible expense, many of us look back and wonder, “Where did the money go?”
Tax Time Budget vs. Tax Time Reality
A law firm’s income and outgo rarely match the projections from 12 months earlier. Tax time forces you to confront the numbers. Take this opportunity to compare your tax filing to your expectations.
For firms operating on a traditional model, two big categories of expense are office space and staff. Every attorney will incur significant expense to maintain their technology. Many plaintiffs’ attorneys advance hundreds of thousands of dollars to finance their cases. Some must borrow to do so, incurring the additional burden of interest. Supplies, equipment, insurance, dues and marketing expenses are all necessary line items for any law firm budget.
The Actual Numbers from Your Tax Filing Are the Starting Point for Your New Budget
Did revenue cover expenses and provide adequate compensation for the owners and employees? Are you satisfied with the percentage of revenue consumed by the various expense categories? How do these figures match the firm’s financial goals?
Many categories of expense can be reduced. This review may be the impetus to reconsider vendor relationships and ongoing financial commitments such as phone plans.
- Consider whether hiring an employee would be more cost-effective than paying an outside consultant for work such as marketing and technology support.
- Conversely, maybe outsourcing more functions would be your best financial move.
- As more employees work remotely, investigate whether your lease allows you to cut back on office space.
You may need to increase some expenditures you have been putting off, such as for an equipment upgrade. Those dollars must be pulled from a different expense category.
The Revenue Side
A shortfall may tempt you to decrease your marketing budget. This is a temptation you should probably resist. If anything, to bring in more revenue, it may be appropriate to increase your marketing efforts and expense.
How do your rates compare to the market? If you haven’t raised your rates in a while, a review of expenses may prompt you to increase your fees.
Be realistic in your income expectation for the coming year. Then create your new budget, including a healthy payout for attorney compensation.
Keep Track and Avoid Tax Time Surprises
Try to find time to regularly review how your firm is spending its dollars. If you are widely divergent from the budget you prepared at tax time, consider how to correct course.
Alternatively, perhaps circumstances have changed, and it makes more sense to revise the budget to reflect the new reality. This could happen, for example, if you unexpectedly started working in a new practice area that changed your business model.
You control your budget; it doesn’t control you.
Ideally, you will generate a monthly comparison of your ongoing income and expenses. After an initial learning curve, law firm accounting software found in practice management tools such as CosmoLex and MyCase can make your life easier. But even if your financial review involves no more than glancing at a bank balance, try to stay cognizant of the changing levels of expense category outgo. That will prevent a big surprise at next year’s tax time.
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