When it comes to debt, I believe that less is more. And it makes me shake my head when I hear about firms going into debt to finance their service business.
Borrowing money to finance a law practice is opening the door to unending debt that will self-perpetuate as the borrowing and re-paying continues endlessly. There are always cash flow problems, crunches, and vital firm expenses that need to be paid.
Here are some ways to minimize the firm’s debt and avoid the downward spiral of incurring debt for your firm:
1. Prepare a business plan. Before you open your practice, prepare a plan that addresses:
what area of law you want to practice?
how competitive that area of the market is and
what your client development and marketing plan will consist of to bring in the business to support your firm
Plan for things like what your client fee structures will be, what your budget is for rent that is affordable when your revenues are not at the maximum potential, and what your monthly operative expenses will be.
2. Hire a professional.
Have a business/financial manager or administrator with a financial background manage the revenues of your firm including billing and collections. If you are unwilling to hear the truth about the firm’s finances or your spending habits, the finances will never be brought under control.
3. Don’t take on cases you can’t afford.
Borrowing money to finance lawsuits is a risk. Unless you can finance a case without borrowing, refer the case to someone else and get a referral fee.
4. Have enough to cover the basics.
Do not borrow money to cover day-to-day operating expenses. If you need to borrow money because you cannot cover the day-to-day operating expenses of the firm, you have another problem. It only creates another firm debt that needs to be paid. Someone needs to take a good hard look at your operations and determine where the leak is and take remedial action.
5. Spend only what is actually in your account.
Do not overspend thinking that there is money out there that is owed to you and when those monies are paid you can cover your spending. If it is not in your operating account, you do not have it.
6. Pay your payroll taxes right away.
Not paying your 940/941 payroll taxes every time you run payroll is creating another debt that will eventually catch up with the firm. Pay your payroll taxes through a payroll company.
7. Don’t over-hire.
Don’t borrow money to add staff in anticipation of new business. The new business has to generate enough revenues to cover the cost of additional staff. Until you determine the new source of revenue is sustainable, get the work done with your existing staff.
8. Leave profits alone.
Do not expand your spending according to your income. If your firm is doing well financially and expenses are under control, do not start spending the firm’s revenues just because the money is there.
9. Use the operating account only for business.
Don’t use your operating account as your personal slush fund. This is often a habit of attorneys in smaller firms who do not have partners, because they do not account to anyone other than themselves.
There are so many ways to handle finances and avoid the need to borrow. Most importantly, manage the firm’s income and expenses—do not let the finances manage the firm. It doesn’t make sense for a lawyer to sacrifice billable hours to manage the firm’s financial future. Instead, hire an administrator or a business manager who has experience with professional service firms. The return will be well worth the investment and one that you actually can take to the bank.
**This article was originally written for and appeared in an issue of lawofficemgr.