Preparing A Budget For A Professional Services Firm
Preparing a budget for a professional services firmWhy prepare a budget?You may answer My business has been going for a number of years and I have never had one before. I make pretty good money, so why do I need one? If I focus on keeping my billable hours up, everything else will take care of itself! I watch my debtors and WIP; this is enough to keep everything on track! I am a professional, with more than enough on my plate and I don’t have time for this financial stuff. My bookkeeper looks after all of this. I don’t have time for this business planning nonsense.Then I would ask you Do you ever have trouble paying suppliers or the tax office or your staffs’s super? Are you really making enough money? How much are you putting into superannuation? Do you know what revenue you need to put on a junior partner? Do you know what costs they will have to cover so their pay does not come out of yours?Do you want a saleable practice? For this you will need at a minimum A practice that has a sound financial basis – revenue, good margins on salaries, cost management, consistent profit and cash flow A marketing process that continually brings in potential new work Sound internal processes. Staff that are well trained and well paid.
Sounds like a business plan?Lawyer’s run businesses just like bakers, shoe wholesalers and motor vehicle manufacturers. It’s justthat they sell legal services not bread, shoes or cars.Being an accountant, I have put as the first item on this list the setting of a budget. But all of these andmany others are important in running a successful business or legal firm.There are many factors for a successful business – so why I have started with these four?Simply because if your finances aren’t in shape, if you don’t have a good flow of new work, if the internal processes aren’t running efficiently and your staff aren’t happy and good at their workWell I don’t think you have a sustainable business.So if I have in some way convinced you that a budget is necessary, how do go about preparing one?A budget should normally be prepared for a 12 month period and be monthly. 1. Revenue Revenue (and here I mean invoices raised and sent to the client) is obviously the first critical item. Since most lawyers charge by the hour we need to accurately determine how much revenue you can earn each month. Months vary with the number of working days and also we need to allow for holidays and sick leave. Apart from Christmas, it is almost impossible to determine when leave will be taken or sick leave. But we can plan on the number of working days in a month. So the method I prefer to use takes a. the number of working days in a month b. and then multiply by hours per working day c. and then multiply by the persons chargeable rate d. and then multiply the total by 88% to allow for annual leave and sick leave e. Then multiply by the persons chargeable percentage f. This then gives you the budgeted revenue per staff member per month
2. SalariesYour third biggest asset is your staff, (your biggest asset is your client base and the second is your IP)But it is your biggest cost. If you don’t manage your staffing levels and remuneration then you candig a hole that can take years to climb out of.An important reason for doing a budget is to plan your staffing levels so that you achieve yourtargeted profit. But more importantly, it is to use these budgets to compare your actualperformance and ensure that the staffing level is right given your actual revenue.If staffing is too high as a percentage of revenue then either: a. You are overstaffed. b. If you need all the staff to get things done, then you are not efficient and you need to look at your processes – you are over staffed c. You have a brief lull in revenue that you know will improve shortly. If it doesn’t then you are over staffed.When preparing the budget the main factor to take into consideration is what basis you pay staff,whether it is monthly, fortnightly or weekly. The budget should reflect the number of pay days ineach month.Superannuation should then just be 9% of the monthly total.3. RentThis is the easiest of all your costs; all you need to do is look at your lease agreement.4. TechnologyThis is or should be your next largest cost. The main items to take into account here are a. Annual Software b. Precedent services c. Computer hardware maintenanceThe first two are readily obtained from last year’s fees. The ongoing hardware maintenance isharder to determine unless you have a fixed contract. Look at the last two years and determine ifthey are representative of what you expect to spend but take into account the age of yourequipment.You may also need to include in the budget an amount for replacement computer hardware.
5. Other costsFor the balance of your costs, get a profit and loss report, by month for the last two years. Review allthe items and then estimate what you expect to spend on the remaining expense in a full year.Then simply divide these expenses by 12 and allocate to each month. This I believe is sufficient aswe can never determine exactly when these smaller costs will be incurred.The only exceptions would be larger amounts that occur annually or infrequently such as PIinsurance.6. Now whatNow review the budget overall and see that based on your experience it all makes sense.Now give it to your accountant and see if he agrees with you.That’s it; you have your first budget. Now what’s the net profit like, is it what you expect, what youneed. If it all looks right but the bottom number looks too low, now you have to work on what youcan do to improve the business.One last point!This will help you to produce your first draft of a budget. It’s not meant to be exact, but to give you abasis to examine how your business is performing and where you need to make changes.But make sure that you input this budget into your accounting software and ask your bookkeeper oraccountant to give you a report each month with at least the following Profit and loss for the current month and year to date, both versus the budget Revenue and wages as a percentage of revenue versus budgetI will shortly be producing a template spreadsheet that you can use for an annual budget.Written by Maurice WatsonWatson Business Accountants56 Clarence Street, Sydneywww.wba.com.au