As the great law practice management guru Jay Foonberg once
said, "You must have positive cash flow if your practice is to
survive." That's a true statement and, unfortunately, a lesson
learned the hard way by many lawyers and law firms out there. But
the reality of practice is that cash flow is rarely consistent for
a lawyer month-to-month, particularly in the first few years of
practice and particularly in certain practice areas.
Nearly every well-established lawyer who started his or her firm
from scratch has dealt with the stress of scraping by at one point
or another. As we build our practices and do good work, cash flow
tends to become more consistent and predictable and, hopefully, our
financial safety net grows in the process. So, how do you get your
practice through the difficult financial times? Part one is plan a
budget within your expected cash flow. Part two is to ensure you
have a financial cushion available.
Part 1: Establishing a Budget
"Every great business starts with an idea followed by an
That's a quote from Eastern Bank Senior Vice President of
Business Lending Joseph Bator, who we'll hear from in part two of
this article. The statement really speaks to the difficulty of
figuring out a budget when first starting out. We are naturally
excited about the prospect of something new and exciting. Starting
a law practice is no different. We tend to focus on all the great
parts -- the fancy new office, the shiny new desk, the business
cards, website, computer, software, etc. It's pretty easy to get
wrapped up in buying the stuff for our practices without
considering the burden of its ongoing expense. How many lawyers
have walked out of the office supply store excited they only spent
$99 on a printer only to learn later that the annual toner cost is
triple that? Ugh. Well, you need a printer, right? And you need
lots of other things, but it's a far better plan to map it all out
ahead of time, rather than spend and then worry as the operating
account falls. Thus the importance of an operating budget.
Your budget should include your expected cash flow and your
expected expenses. Cash flow will be easier to estimate as you
build the practice, but do your best to be realistic. Most
accounting and practice management software programs provide the
benefit of financial reports. Pull cash flow reports for the past
three years (or less if you haven't been in practice that long) so
that you can see your revenue and expenses monthly, rolling up to
an annual figure. Note the trends and see if you can assess why the
ups and downs occurred. If you've previously gone through this
exercise (you should do it no less then annually), note where your
actual numbers came in compared to budget. If you were way off your
budget, figure out why and do better this time around.
Now, considering your expected revenue, review your expenses to
determine what, if anything, needs to change. The proper way to do
this includes a review of your marketing expenses and the
corresponding return on investment. If there is opportunity to
generate more business with a greater investment, you might want to
work that change into your overall budget. At a minimum, you need
positive cash flow or you'll eventually go out of business, so if
your budget doesn't provide for a profit, keep at it until it
For the lawyer just starting out, there are certain expenses
every lawyer should consider. While this is not an exhaustive list,
there are other resources, including On Demand MBA CLE programs on
starting your own practice. Generally speaking, you should consider
certain essential expenses including office rent, parking, payroll
or service provider expenses, taxes, professional association and
licensure dues, insurance (malpractice, workers' comp., medical,
general liability), phone service, fax service, website development
and hosting, stationary, furniture, office equipment, banking fees,
office supplies and the servicing of any professional fees, such as
that of an accountant.
Part 2: Establishing a Financial Safety Net
The reality of business (and life, for that matter) is that
sometimes things go awry. When things go awry in business, there
are often financial consequences. The prudent practitioner,
therefore, should plan for the likelihood of periodic financial
challenges by creating a financial safety net. There are two ways
we lawyers ordinarily do that. The first way is to save up an
adequate cash reserve. That's nice when possible, but more
difficult to accomplish than the alternative. The alternative is a
business line of credit. Getting a business equity line is easier
and less expensive than you may realize. Because the LPM Section of
the MBA is partnering with Eastern Bank on May 25 to present a law
firm financing program, I thought I'd sit down with Joseph Bator
and Shawn Ford, two of Eastern's financing experts, to learn more
about what's available and how the process works.
Joe and Shawn, what can you tell me about your
backgrounds in business lending?
Bator: I've been at Eastern Bank since 2002 and
am the director of business lending. I started Eastern's business
banking division in 2006 and have run it ever since.
Ford: I've been in lending since 1995 and have
been a VP in Eastern's business lending division, assisting
clients, including many lawyers, in Massachusetts, New Hampshire,
and Southern Maine for the past two years.
Joe, is it common that lawyers seek out financing and,
if so, what products do they typically consider?
Bator: We do a lot of financing for law firms
and other professional practices. When you have a professional
degree, you're educated, can work for almost forever, and you
generally understand when utilizing financing makes sense. Lawyers
consider business lines of credit and term financing.
Are lawyers eligible for financing immediately upon
Bator: No. In order to extend credit, the
lawyer would need to be in business for at least one year. Once a
lawyer has been in business for a year, meaning they've set up a
business entity and have been practicing under it for a year, the
lawyer would be eligible for an SBA-backed line of credit.
Shawn, in what circumstances do most lawyers seek out
Ford: At first, lawyers typically approach us
for a business line of credit. A line of credit is a lending
vehicle that the lawyer can use when he or she wants or needs.
There's no obligation to use it and no cost associated the line if
it's not utilized, except for the $100 application fee. After the
first year in business, which is often a challenging year, lawyers
typically look to establish a better safety net. That's precisely
what the line of credit is for -- cash available when it's needed
most. Lawyer income can be inconsistent, especially in the practice
areas of personal injury and real estate, which may have fewer
larger payouts or seasonal trends. Lawyers also sometimes use
equity lines to fund the buyout of a partner. Once a firm is more
established, the lawyer or lawyers may come back for a term loan. A
term loan is a loan with fixed payments, an amortization schedule,
and a specific term end date. A term loan would make more sense
when a lawyer is more established and is taking on a bigger
expense, such as to fund the build-out of an office space.
Joe, what is the typical amount of a line of credit for
a lawyer and what's required of the lawyer to get the
Bator: That varies, but our standard business
line is $50,000. Eastern Bank currently extends business lines in
that amount to lawyers with good credit who have been in business
for a year. There's no additional documentary requirements. When a
lawyer seeks a larger amount, there's more to the qualification
process. Generally speaking, a lawyer needs positive cash flow of
1.25x to qualify. So, to illustrate, if the lawyer's monthly
payment on the line is $100, the lawyer must have $125 a month in
available monthly funds - that is, profit or expendable income.
So, Shawn, how would you calculate available funds for
this purpose if the lawyer's income is inconsistent?
Ford: That also depends. The whole point of the
line is usually to provide a safety net during inconsistent periods
of income. The answer is that it depends on the individual
practice. Some practices may have choppy income and the review of a
three month period may be adequate to assess the lawyer's ability
to pay the line back. So, for some practices, we may look at a
larger period of time, like a 12-month cycle. Additionally, we
sometimes have to look to the personal expenses of the lawyer
because lawyers, mostly in solo and small firms, tend to distribute
nearly all profit to themselves at the end of the year. That
distribution may eliminate the firm's profitability and so we'd
need to look to the lawyer's personal expenses to assess whether
there are adequate resources to pay the line back.
What should the lawyer or firm seeking financing expect
in regards to personally guaranteeing the debt?
Bator: Unless there are significant assets of
the firm, the lawyer practicing on his or her own or the lawyers of
a smaller firm, should expect to personally guaranty the line of
credit and term financing. When the firm size and loan amount is
larger, we'll move onto a non-recourse loan. That's because the
firm income and assets tend to be more substantial and, if the line
is large as is typically the case with more lawyers at the firm, it
becomes uncollectable from any one lawyer.
Any final tips for lawyers seeking to protect themselves
from financial hardship with business lines of credit or term
Ford: I'd just caution lawyers from putting
business debt on a personal credit card, especially mixing both
personal and business expenses on that card. One problem we see
with newer lawyers is that they've done just that and are now
seeking to pay the credit card off with a business line of credit.
We can't, however, finance the payoff of personal debt with
business debt. So, the lawyer using credit cards should have a
separate card for the firm on which he or she puts all such
Bator: The only other piece of advice I'd give
is to keep good financial records. Keep your accounting current and
employ a bookkeeper if necessary to keep your books in order. Your
trust accounting is required under your professional rules, but if
you neglect the operating account accounting, you won't have a
clear picture of the health of your business.