A new year, a new budget: How law firms should be planning their finances right now

A budget is a set of intentional decisions — about how the firm will allocate its resources, what it will invest in, what it will protect, and what it is willing to cut. Without one, every financial decision gets made in isolation, without the context of the firm’s broader goals or constraints. That leads to overspending in some areas, underinvestment in others, and an end-of-year reckoning that may catch leadership by surprise.

Start with actual performance data: what did the firm actually bill, collect, spend, and earn? Where did revenue come from, and where did it fall short? Which expenses grew unexpectedly, and which ones never got used? It’s important to not only look at one year, but also review multiple years of data for outliers in revenue and expenses trends. Can spikes be explained?

The key categories to a budget should cover:

1. Revenue – review by practice group, review new client targets, expected collection rates.
2. Personnel – salaries, benefits, new hires, recruiting costs
3. Overhead – Fixed expenses – rent, subscriptions, insurance
4. Overhead – Variable expenses – M&E, Office supplies, travel
5. Marketing – website, events, sponsorships, business development expenses
6. Professional – Bar Dues, CLE, other professional memberships, outside consultants
7. Capital – investments in equipments, software upgrades

Dive into the details of each category. What expenses are included? Question recurring costs, identify subscriptions, and vendor contracts for renewals. Build in known increases; rent escalations, insurance renewals, planned raises for staff.

After taking the time to build the budget, don’t just put it in a file until the next year. Use it to review actuals as the year progresses. How did the firm do in predicting revenue and expenses? Use the budget to help make decisions when staff ask about adding additional expenses. Are we anticipating being able to afford it?  The budget isn’t the end-all be-all, but it is a great tool to give partners an idea of how the end of the year will shape up to look for tax planning and distributions. 

Let’s say you are 4 months into the year and you realize the budget vs actual is over or under. Maybe an attorney brought in a big client, and that significantly increased revenue. Maybe an attorney decided to leave the firm, and that leaves a gap in your revenue projections. Make a version 2.0 of the budget and adjust the remainder of the year to be more realistic. This helps you plan accordingly for real day-to-day business. The budget doesn’t have to be stagnant.

The process does not need to be complicated. It needs to be honest, collaborative, and grounded in real data. Firms that build that habit find that budgeting stops feeling like a chore and starts feeling like one of the most valuable conversations leadership has all year.