A financial plan is a road map for achieving your law firm’s financial goals. It provides you with an overview of how much money the firm needs to generate each month, what investments you should make, what taxes need to be paid and how fast they need to be paid, and other aspects of running a successful business. Take a look at how to better formulate law firm finances on a yearly basis.
Set your law firm’s financial goals
Once you’ve taken the time to define where you are and where you want to be, it’s time to start setting some goals. The first step in goal setting is deciding what type of goal you want to set. There are four main types:
- Specific and measurable (e.g., “Increase average revenue per client by 10% over next year”)
- Time-bound (e.g., “Increase average revenue per client by 10% within 6 months”)
- Realistic (e.g., “Improve the efficiency of the billing process.”)
- Achievable (e.g., “Decrease employee turnover rate by 20% over next year.”)
Make an inventory listing all of your current assets and liabilities
For the next step, you will make an inventory listing all of your current assets and liabilities. This is where you list every single item that has value to help in determining what you have available to work with. Your assets might include cash, bank accounts, investments (stocks or bonds), real estate, and more.
Your liabilities are the opposite of assets; they are what you owe others for credit cards, loans, or mortgages. You may also want to list any other items that are important to your business such as equipment used for photography or law practice computers and software.
Determine if you have sufficient funds to support your law firm’s operations by estimating your net income or loss for each month
To know how much money you need to make each month, you must first calculate your net income or loss for each month. This will help determine the amount of income that you need to keep the firm afloat.
To do this, take the total amount of money that came into your law practice during any given year and subtract from it all of the expenses associated with running your law practice. This figure can be calculated by adding up all of your expenses and then dividing by 12 to account for each of the 12 months. If a month had an unusually high number of expenses, such due to litigation fees or court costs, you may want to average those months out over several months so as not to skew the results too much.
Identify the tax consequences of your actions
Tax planning is an important aspect of the financial plan because it can help you to minimize the amount of tax you will pay. By identifying the tax consequences of your actions and then minimizing them, a lawyer can save thousands or even millions over their lifetime.
To make sure that a financial plan works for your firm, it’s important to identify the tax consequences of each action taken by you and your staff. This means understanding how much each action might cost in terms of lost earnings, penalties, and interest charges if applicable. The first step is to understand what kind of person you are: Are you someone who prefers stability? Do you like risk-taking? Or do you prefer investing only in things with proven track records? Once you have an idea of that, then you should have a better idea of what risks you are willing to take in terms of your taxes.
Consider the impact of inflation on your law firm
The impact of inflation on your law firm finances is subtle yet powerful. Inflation is a hidden tax that gradually increases the cost of goods and services, eroding the value of your assets over time. The impact of inflation on the economy can be seen in rising consumer prices, increased borrowing costs for businesses and governments, lower bond yields (meaning less investment in fixed-income securities), and higher real estate values as people look for alternative investments. These trends are all reflected in stock markets worldwide.
It’s important to remember that every law firm is unique, so the steps outlined above are not meant as hard and fast rules. You may find that certain aspects of your plan need to be adjusted or modified based on your specific situation. For example, if you’re starting a new venture from scratch with no existing clients or assets then it might make sense for you to take out a loan at first before taking equity investments or loans later on down the road as your business grows.