In my previous blog post, I talked about two important expenses: your salary and your payroll. In this post, I want to discuss two more important financial aspects that should ALWAYS be at the forefront of your mind and your business:
- Core capital
You see all of that money sitting in your account and you think there’s no harm in taking an ownership draw. Trust me, I myself have done this a few too many times and usually to my own detriment! Regardless of how much money is in your account, ownership draws need to come LAST. Aside from your necessary expenses, taxes and core capital should come first.
Always Prepare For Your Taxes
Once you start earning in the low six figures you have to start paying your federal taxes quarterly. These quarterly taxes are estimates based on your previous year’s numbers, so your CPA should come up with your estimated quarterly payments. That way, you have an idea of what you have to pay to the IRS, with the hopes that you won’t get stuck with a huge tax bill at the end of the year.
Regularly check in with your CPA. If you start to grow your revenue and have an upward trajectory, then s/he needs to make sure you are still paying the right estimated taxes.
You do NOT want to get stuck with a big tax bill and not know how to pay it. The IRS does offer payment plans, but they charge insane interest and you do not want them to be your lender. Instead, you want to be prepared.
Put away 20% of each and every payment. This is what we came up with to make sure we’re always well equipped to pay our taxes. 20% of each and every payment we get is set aside for taxes. Yes, that’s a lot of money to take off the top, but once you take it away it’s ready to go if you get stuck with a big tax bill.
By the end of the year maybe you won’t have used up that full 20%, which is great! That means you now have a lot of options for those savings. Most importantly, it means you didn’t go broke trying to pay your taxes, and you didn’t have to use the IRS as your lender!
Save Up For Your Core Capital
The “core capital target,” as recommended by Simple Numbers, is two months of operating expenses AND no debt. This is another instance where knowing your numbers is extremely important. You need to know all of your operating expense costs to be able to come up with this number, and then you need to have that money sitting in an account for two months without touching it.
Yes, it is tempting to pull that out as a dividend. When I see that money, I just think of the investment properties that I could get or the vacations I could go on. It’s like your favorite dessert sitting on a plate in front of you that you want to eat so badly but you aren’t allowed to even touch. However, you need this in case of emergency. Things happen in life.
For me, it was a snowstorm that shut down our entire city and surrounding areas for a week. That meant NO new business at all during that time. Rent and all the other bills were still due yet no money was coming in. This is exactly how one week without any revenue can completely cripple a business that is unprepared for it, and one month can make a business go under.
I have a lot of colleagues in North Carolina and Texas that felt this when they went through a devastating hurricane. Not only did they lose business, but they also had a lot of damage to their offices. Without savings, it could’ve felt like going bankrupt was the only option.
Leaving that money in the bank will help prepare you for any unforeseeable event that could happen. Set yourself up for success by having savings!
Take Dividends Last
After taking care of your expenses, debt, and setting aside money for taxes and your core capital, then and ONLY then can you take and enjoy ownership draws! Be methodical about putting money away for taxes and creating your savings. The great thing about putting money into your savings is that once it’s put in place, you don’t have to worry about it anymore. Once you’ve set aside money for taxes you can relax and check it off the to-do list! Then you will be making money! Now you need to know just how much you’re making.
What You MUST Track For Financial Success
Aside from being smart with your payroll and salary cap and setting aside money for your taxes and core capital, here’s what you MUST track to have success in your law firm:
- Phone calls
- EVERY cent that comes into your law firm
Many people feel like it is too hard to track these things, but they are easy to track once you incorporate them into the systems in your law firm.
Every person who answers a phone should track calls in two columns: one to track those who want a consult, and the other to track who signs up.
- Every time there’s a phone call for a consult, just tally it on the sheet under the one column. And then if that person also signs up for a consult, it goes in the second column as well.
- It is important that you tally in both columns if they call AND sign up because you need to be able to see your conversion rate.
- If you have more than one person who is taking calls, you can see who converts the most.
You can easily generate reports once you have the following information:
- How many calls you get each month
- How different marketing efforts affect these numbers (you can even add to your tally sheet how people found out about you)
- Your average conversion rate
This is very important information for getting a full view of your firm. I myself just learned about this simple tallying method and we are implementing it in my firm, so I am really excited to get some good numbers and analytics from this new process!
In tracking consults, you get to know:
- How many consults you have on average per month
- Which months can be truly considered “slow” by looking at previous years’ trends
On your consult tracking sheet, which can be as simple as an Excel spreadsheet, you can write the person’s name, assign them a consult number, and note how they found out about you.
Our numbering system looks like this: C19-0207
That code represents our seventh consult in February 2019. When you go through our consult lists, you can easily see how many we did each month, and it’s a simple add-up to figure out how many consults you did in the year.
I would highly recommend using this code or a similar organization code to keep track of consultation and conversions, you can easily incorporate it into your consultation process.
The goal of tracking your contracts is to figure out how many cases you are opening each month, observe trends, see how fast people convert, and more. It also helps you see what your main case types are, how much you earn from each case type, etc.
You need to have a separate contract-tracking sheet that uses a similar numbering system as the aforementioned consultations system. Indicate:
- Client name
- Date of consult
- Date of sign up
- How they heard about you
- Case type
- Case earnings
I have not been putting the case earnings and I regret it, so we are adding that in! You can build this into your case opening process so it’s easy to record and track.
This is critical information, so you need to make sure that you have a process to make sure it’s all being recorded and tracked.
EVERY Cent in Your Law Firm
I don’t care what programs you use, I want you to have a backup excel spreadsheet that records EVERY SINGLE PAYMENT in your firm, including:
- Monthly payments
- New contracts
- Anything else that could possibly come into your firm
Your money matters and you must track it, there is no such thing as over tracking. If you rely on just one thing, let’s say Quickbooks, or even your bank account, it is easy for something to slip through the cracks. For example, a $100 cash payment that wasn’t deposited but should be recorded anyway.
It’s also good to have a backup record because people are human, and they might forget to issue a receipt when a client makes a payment for example, and then there’s no record of the payment anywhere. But if every payment is logged on an excel sheet, then it’s all accounted for. In my firm, only my business manager and I have access to this document.
Every payment is reported to my business manager and he logs it in the excel sheet. He also checks the credit card history every day to make sure that he has logged every credit card payment, and then checks our case management system to compare receipts to his list.
It sounds tedious, but it takes about 30 seconds to log a payment. This is really important for tracking your goals and making sure that you are meeting your benchmarks.
This is just the tip of the iceberg, but I want you to get accustomed to implementing these tips: pay yourself, figure out your salary cap, trim the fat and increase efficiency, build your savings, save for taxes, and track everything in your law firm.
You likely have some homework to do, so get out there and do it. DO NOT LOSE MOMENTUM! DO THIS NOW! I want you to have outrageous success, and this is the backbone of all of it!
If you can believe it, I have even more knowledge to share on this topic! If you’d like to learn more about tracking your numbers, sign up for my Six Figure Solo program! Six Figure Solo now comes in three tiers – Executive, Solopreneur, and CEO. Sign up here!