We have previously discussed the importance of cash flow statements, one of which is the paid-expenses cash flow form. This form tracks your expenses month by month in a number of different categories, including employee salaries, payroll taxes, partner/shareholder draws or salaries, rent, utilities, insurance information (split into three types of insurance), marketing and public relations, Internet/website, office supplies and software, phone/copy/fax, professional dues, education, library expenses, professional services, travel/entertainment and fixed loan repayments.
Expenses in a law firm can be predicted with greater certainty than revenues, because in a professional practice setting, the expenses tend to be limited in kind and repetitive. Fixed expenses usually don’t change significantly, regardless of what the firm is doing; variable expenses can vary with firm activities or decisions.
When it comes to expense categories, it can be difficult to gauge the numbers. You want to use industry standards or guidelines as a beginning point, but different surveys may indicate different standards — and the actual percentages to allocate to given expenses based on your revenue will vary, by size, region, type of practice, etc.
Having been asked many times to suggest reasonable guidelines, I have hesitated. Every lawyer approaches his practice differently, with resulting percentages varying tremendously. However, the following percentages based on total revenue give one example of how expenses of the average law firm might be estimated. Caution: use these approximate figures as guidelines only:
- Staff salary and benefits, not including attorney draws: 45 percent of total revenue
- Rent: 9 to 17 percent
- Equipment costs included on the summary charge: 2 to 6 percent
- Malpractice insurance: at least 4 percent
- Outside professional services (e.g., accountant or management or marketing consultants): 2 percent
- Library expenses (e.g., subscriptions, books, manuals, forms, online services): 2 percent
- Marketing and PR expenses: 2 to 6 percent (much higher for a startup)
- Attorney draws are based on what remains
Note that the total of the above expenses is 66 to 82 percent of total revenue, leaving 18 to 34 percent for attorney draws or salaries.
Assess your assembled financial facts to see if any of the expenses need to be increased or decreased for your cash flow forecast. Some items cannot be controlled or reduced once set in place for the year; these items typically include rent and insurance.
However, some items can be reduced, such as library expenditures (e.g., you can share a library with another practice, use the local law school library, or shift to lower-cost web sources); payroll (the smaller the practice is, though, the more limited you will be in your ability to reduce this expense); and dues and subscriptions.
Finally, if you know when to anticipate low and high cash flow periods, you can postpone or advance equipment purchases.