Starting Solo: From Oath to My Own Office
by Douglas Gierhart
Everything I learned about cash flow management, I learned from one of the best universities in the world: the College of Hard Knocks. Regrettably, I did not learn cash flow and money management in law school; and I really did not know how to learn it.
In the beginning of my legal career, some things came easily to me – clients actually came to my office; and if I had a question about procedure, I could just ask another experienced lawyer. However, the absolute hardest part of running my office was understanding cash flow management; and I was too embarrassed to talk to anybody about it.
Having gone through extreme financial adversity after my divorce, and after the sudden drop in cash flow after 9/11, I realized I could not continue to operate my law office finances the way I had done in the past. I could no longer fly by the seat of my pants. I took the next necessary step and admitted I just didn’t know how to do it. I decided I was going to learn. Truth 1) You have to want to learn.
For much of the population, money management does not come easy. Some people seem to be hardwired to manage numbers — people like mathematicians, accountants, and engineers. But many of us have trouble wrapping our heads around it!
It wasn’t easy for me, and I consider myself fairly intelligent. I had learned some bad habits growing up, and as a result, I developed a bad philosophy about money.
I began working at age 10 selling TV guides to people in my neighborhood. I would walk or ride my bicycle to their houses and deliver the TV guides to their doors. I usually did this on Thursday and Friday nights, and they paid me on the spot. I have absolutely no recollection of what I did with the money I earned from this business venture. I certainly had no direction from my parents about saving or using it to my advantage.
I then worked my way up to being a newspaper delivery boy and did that from about age 12 to about age 16 or 17. I bought a motorcycle and paid for it with my income from the delivery route. Again, nobody told me about how to manage my money; and as a result, I had no savings for a car, nor did I make any wise investments. Truth 2) What you learned about money management, you probably either learned from your family or made up as you went along.
Maybe you have decided to open your own practice but don’t know where to start financially. To begin the process of managing your money and cash flow, you must learn to budget.
The word “budget” carries many bad connotations. However, a budget is nothing more than a plan for disbursing your money. If you don’t budget, you may find someone else wanted your money worse than you did, or that it went someplace else because you didn’t have a plan. You can’t be financially successful without a plan. Truth 3) Budgeting is essential!
I used to have a pastor that would talk about “stinkin’ thinkin’” and the problems it created in our life journey. The same is true for your law office. Your clients come in by the grace of God. You can develop a marketing plan, make yourself known, attend marketing meetings, Chambers of Commerce meetings and advertise until you are hemorrhaging money; but clients will only come in when they need your services. People get divorced, people die, people have car wrecks, but they may not come to your office! Truth 4) You can’t force clients to come in, so manage the money you have.
Many young lawyers think they should drive the nicest cars, wear the best clothes and have the nicest watches “because they deserve it.” I was one of those who thought I had to drive a nice car the minute I graduated from law school. I presume I was bombarded by TV, movies and friends who told me I must have been making a lot of money since I became a lawyer. I just forgot to look at my checkbook and figure out that I wasn’t! I didn’t deserve anything. I wasn’t guaranteed to make money, but somehow I thought for sure that was just going to happen — that was normally what happened with lawyers, right?
I make money now because I have a good reputation in my community, because I worked hard and I learned how to manage my money. Truth 5) Successful lawyers don’t just happen. They are created over a long period of time.
Budgeting begins with knowing the difference between a “need” and a “want.” In your personal life, you need housing, transportation, food and clothing. There are really only a few needs in a law office, but there are many wants.
You must understand the struggle, especially with lawyers, to feed our egos with wants. One example of this is my purchase of my Cadillac CTS. I really enjoy my car. However, did I need that Cadillac? No, I wanted it. I had a nice enough Nissan Altima, but that Cadillac fed my lawyer ego!
So, decide what your needs are. You have to seriously question what you think you know about your needs. With the advent of newer technologies, you can operate your law office differently than in the past. Ask yourself questions at each step along the way because overhead affects your ability to manage cash flow and how much you ultimately put in your pocket.
First, you have to figure out whether you need office space. For some lawyers, office space is an unneeded expense; their office is a virtual office. One lawyer I know practices Social Security Disability, VA disability and federal worker’s comp. He doesn’t meet with clients in an actual office. He exchanges emails and has clients sign releases via the Internet.
Ask yourself, if you need an office space, what size of space will you need? What utilities will you need? Do you need a landline phone, or are you going to operate with a cell phone only? Also, will you need a secretary or a legal assistant? If you have a legal secretary, how much are you going to pay, and how many hours can you expect to get out of the money you have budgeted for employees? Truth 6) Remember that your overhead is directly related to how much you take home.
My best advice is to begin small — including your office space. You will then need to try to figure out what your minimum salary is. Unless you have money from other sources, you have opened your law office to make money. The lower your overhead, the more money goes in your pocket. After you have done this, figure the total cost of all the expenses, and divide that number by the number of times you are going to pay yourself each month. To cover those expenses, decide whether your anticipated hourly rate and flat fees will cover your budgeted expenses. If not, then you have to rethink your overhead and cut where you can. Truth 7) Live within your income! You’ll do even better if you live well within your income.
WHAT BANKING ACCOUNTS DO I NEED?
You should set up at least three different accounts to manage your money. Don’t forget that your law office is a business. Running it as a business is absolutely necessary. I have an operating account at my office from which I pay my weekly payroll, rent, utilities, insurances, and all other bills necessary to run my office. I also have my fee account that all my earned fees go into. I transfer my weekly budget to my operating account from this account.
I also have a trust account that I operate because in my practice, I must draw from unearned retainer fees. I have settlements from personal injury cases that go into the trust account to pay my fees and liens, and then I distribute the balance of funds to my client. I also have a separate savings account for my taxes and a money market that I use as my backup savings.
Don’t underfund or undercapitalize your accounts to operate your business. In my operating account, I have budgeted to make sure I have at least two weeks — the current week and one other week — of payroll, rent, utilities, insurances and other expenses. In your account, you should do something similar.
In your tax savings account, you should also budget to make sure you have an amount equal to at least two months of taxes. In your fee account, you will have all your earned fees, and from these funds you should try to fund all your accounts. You should determine how much you want to keep in your earned fee account and then budget for emergency, bonus and “when life kicks your butt” transfers.
Now let’s talk about savings. Budgeting basics are the same for your business as for your personal life — budget for both savings and expenses. Your failure to save will put pressure on you when money doesn’t come in. Life is going to hit you, and things aren’t going to go like you have planned. Plan on it! The old truth is still truth. Truth 8) Failure to plan is a plan to fail.
Why save? Because you will never get ahead if you don’t. You should save extra to put into your operating account, fee account, savings account, and money market. You are foolish if you think you don’t need to save for slow times. If I let my accounts get down too low, do I sweat and stress? You bet I do. But because I have a budget and cash flow plan that works, I don’t sweat and stress as much.
Yes, you must pay taxes! This is the top priority when it comes to savings. Some might argue that this should be a savings account, and I would agree. You need to develop it as a habit. This is a necessity. I have had to represent clients who didn’t understand this basic concept, and their business closed because they didn’t set up and save for the sales tax. They wake up one day and realize they are in deep with the OTC because they have a cease and desist sign posted on the door of the business.
Since, as lawyers, we do not have sales tax, you must save for either an estimated tax or payroll withholding taxes. Regardless, you should recognize this as a savings. Figure out how much you should save either from the schedules or by employing the service of an effective accountant.
Fund your tax account each pay period! Pay it immediately when payroll is made, and put it in a different bank than your other accounts. This will help you realize it is not your money. The IRS will tell you, and you must learn this truth, that this is trust money. Learn from my mistakes. I didn’t figure this out early on, and it has created problems for me in the past.
If you do not pay, they will come! Because your payroll and withholding taxes are considered trust money, the IRS and OTC will come after these amounts with vigor. They do not look kindly to you using their money. So, remember, fund your tax account in a separate savings account at a different bank.
Because we don’t want to have the IRS and OTC come knocking, the idea at my office is that we should have enough money in our tax account for this month’s and next month’s taxes. If you fail to pay, you will receive a notice of intent to levy, and they will levy if you fail to make arrangements to pay. It is a waste of your time dealing with your accountant and the IRS or OTC if you didn’t properly set aside your withholding taxes to begin with. Another reason for having an extra month of taxes in your tax account is that there are slow periods when funding the taxes is a real stressor, which is a good segue to knowing about cycles and seasons in your law office.
CASH FLOW MANAGEMENT
To lessen your stress and prepare your budget, you must also understand that there are seasons or cycles in cash flow. In my law office, we know April, August, November, December and January are slow months. These slow times are as regular as clockwork; and because I know that, I prepare by saving money during the busier times.
After several years, we finally figured out why these months were slow for my business. April was slow because people were worrying with tax bills. August was slow because clients’ children were going back to school, and they were buying clothes and school supplies. November, December, and January were slow because of the holidays. Clients are always more worried about paying for their families’ Christmases than paying for their lawyers’ Christmases. I struggled managing my cash flow for years, until I finally figured this out and began budgeting.
Also, realize these issues happen every year! Dave Ramsey is someone I have learned much from about managing cash flow. He comically says people act like Christmas is celebrated on a different day each year and they exclaim, “Oh my gosh, they moved Christmas! It’s December this year!”
You may have unanticipated lulls in your business also. This past spring, my bankruptcy practice was slow and didn’t hit the levels it did in the past. I talked with several bankruptcy attorneys and found that their practices were off too. I learned from talking with other attorneys that this was a season of low cash flow. Because I knew to look for a season or cycle, I didn’t panic and make an unwise choice, like additional advertising, to draw in business. The problem wasn’t what I was doing, but that industry-wide, things were very slow. Truth 9) There are cycles or seasons in your cash flow. Learn to budget for them.
The last several years, I have had the opportunity to have young lawyers in my office through office shares; and I am employing one in my own office now. Invariably, many young lawyers make the mistake of undervaluing their services. They usually take cases on flat-fee basis; and in their haste or need for cash flow, they underestimate the time spent in a case. They wind up cursing that they aren’t making any money at being a lawyer. Truth 10) Understand and don’t underestimate the value of your services.
The best way to help control the cash flow is to make sure you make clients pay as the work is being done. They would be offended if they had worked all week and weren’t paid by their employers. However, they don’t realize they may be hurting you when they don’t pay you.
Many clients have an unrealistic view that all lawyers are rich. This perception is propounded by TV, the Internet and society. Society seems to believe that once we graduate from law school, we are presented a check for $1 million. They seem to believe we have persevered, worked hard and are now rich.
What they fail to realize is that graduation is nothing more than a transition. I am working harder now than I did years ago, but I am making much more money than I did. I also, finally, graduated from the school of hard knocks. Truth 11) Clients need your services when they hire you and are less likely to pay after the work is done.
If you have hourly rate fees, bill monthly. This improves cash flow immensely. I began the habit of billing early on, but it is so much easier now with the available software that is on the market.
When I opened my law office in 1984, we billed in a cumbersome manner, and it was irregular as a result. Billing regularly is a necessity if you choose to have hourly rate billing. There are many types of billing software on the market which reduce the time to complete the task of billing to less than an hour. Simultaneous billing is the best and easiest way to process billing.
I am presently using PCLaw, and have been using it for several years. It is a good product for me as a small firm practitioner. Jim Calloway of the Oklahoma Bar Association is an excellent resource to talk with about billing software and its strengths and weaknesses.
Remember to talk with other lawyers you respect about what they use. Billing regularly informs your clients of the status of their case, although they rarely realize this, and it insures better cash flow. Before you open your office, trust this as a truth — clients won’t pay unless you send them a bill. They won’t come in and ask why they haven’t got a bill from you, but they will tell you they didn’t pay because they didn’t receive a bill. Truth 11) Billing regularly improves cash flow.
FIND YOUR NICHE
The final advice I can give in managing your cash flow is that you must find your niche. In finding your niche, you realize how to make your law office operations efficient and maximize your return. This means managing time and case load. We know that by filing at least two bankruptcies at the same time we are maximizing our time and maximizing the return on the fee we charge.
It is very difficult for me to cite to specific passages in books I have read or conferences that I have attended to correctly cite my authorities. However, I need to give credit to Ron Blue’s Master Your Money, Dave Ramsey’s Financial Peace University, George S. Clason’s, Richest Man in Babylon, Robert Kiyosaki’s Rich Dad, Poor Dad and Thomas J. Stanley’s and William D. Danko’s Millionaire Next Door.
About The Author
Doug Gierhart is the founding attorney of Gierhart & Associates, a general practice law firm focusing on bankruptcy and di-vorce located in Choctaw. Mr. Gierhart is a 1974 graduate of Shawnee High School, 1978 graduate of OU, B.A. in Letters, and 1981 graduate of OCU School of Law. Mr. Gierhart is a former officer in the General Practice Section of the OBA and a former editorial board member for the ABA Solo & Small Firm Practice Section.
Originally published in the Oklahoma Bar Journal, October 6, 2012 - Volume 83, No. 26