Budgeting in law firms, in matters of both litigation and transaction is an important tool for success of the law firm.
A law firm’s financial management quality affects the way that the firm makes decisions. A law firm that has a strong financial management policy will be able to ensure that all its expenses are properly met and that none of its important work suffers due to paucity of funds. Proper and adequate financial management in a law firm also indicates that the firm has accurately anticipated its financial requirements by profit planning and budgeting. A firm suffering from cash shortages may not be able to handle cases properly. In contrast, a law firm which is well managed financially may be able to withstand the difficulties even if the firm is faced with a major claim. Therefore, generally, firms that are not well managed financially are not able to successfully survive for very long time.
The process of creating a budget produces an extraordinary amount of work for law firms. It sometimes causes a noticeable slow-down in the production of both legal work and support services.
Budgets are key tools that law firm administrators use to manage their firms’ operations and finances. It is very important that all law firms design their budgets properly and in time so that the topic of budgeting and financial management does not take up much of the firm’s time during year-end when attention is shared with other critical tasks like distributing profits and preparing for the annual audit.
To ensure a successful budget season and a reliable end-product, the budget process must be closely managed. Assistance should be solicited from key players who have the requisite knowledge and skills to provide input for their functional areas. Attorneys in charge of practice and/or geographic units must be brought in at the onset. Schedules need to be coordinated and calendars developed, highlighting key deliverables, so that all members of the budget team fully understand their roles. Communication is essential during the entire budget cycle – including the planning, development, and review phases. A budget planning or “kick-off” meeting can be an effective vehicle for explaining the firm’s strategic direction and for defining expectations.
The foundation on which the revenue, expense, capital, and cash flow components of a law firm with a successful financial management policy functions should be based on three key principles: flexibility, integration, and accountability.