Community Table: 2024 Year End: What’s Your Business Plan for 2025?

Episode Notes

Transcript

Danielle Hendon:

It is not over in Q3, but I know so many people might see that number and be like, now we’re going to hit the holidays and we’re going to do all this. What you do in these next three months is going to be the momentum you carry into next year.

Announcer:

This is Unbillable hours community table with Clio, a monthly virtual round table where lawyers discuss issues their practices are facing and receive feedback from lawyer and law firm management consultant, Christopher, T, Anderson. Join the conversation live every third Thursday at 3:00 PM Eastern. Today’s episode is an in-depth discussion on what law firm should or should not be doing in the fourth quarter.

Christopher T. Anderson:

Alright, welcome to the Unbillable Hour community table. I’m really excited today to have Danielle Hendon of four corner, CFO as our guest. As you hopefully remember, she’s been on the podcast recently. Danielle, in case people who are listening to this episode, did not get a chance to hear you on the unbillable hour before. Let’s tell ’em a little bit about you and tell them to go listen to that episode. It was really good one.

Danielle Hendon:

Absolutely. I’m going to give you the really quick introduction because I do want you to go listen to the podcast, but basically as a fractional CFO, my job is to help you understand the story that your numbers are telling you because when you understand that story, you get to take control of where your firm goes in the future.

Christopher T. Anderson:

Cool, and I’ll just mention since Danielle did and she’s a founder and owner of four Corner CFO and she brings big business analysis to entrepreneurs so they can run their businesses better. As we’re recording this, we’re coming close to the beginning of the fourth quarter and that really is kind of when we all start getting ready for 2025. I mean, Rob and I have worked together on budgeting process for 2025 already and we’re finalizing that, but what are some of the things that law firm owners, our listeners, owners of small to medium sized law firms should be thinking about as they head into the fourth quarter? Danielle,

Danielle Hendon:

A big part of your budget is looking at the trajectory and the growth that you’ve had this year and not just budgeting for the same thing next year, but forecasting what does that look like on the same trajectory next year, whatever that growth is, and I know different areas of law have some seasonality to them, have some project-based relationships, but really figuring out what is that going to look like and what kind of team do we need to support it? Because a lot of times we will sit and budget with numbers on paper and not think about the people and the hours that need to go behind the numbers on that paper. So I want to remind everybody to not just repeat this year when you’re looking at your budget, but truly project out. What do you think next year holds? I know a lot of our law firms that we work with did not see the same struggle this year that a lot of other industries are seeing in this election year and you guys have had some pretty significant steady growth still happening and in that vein we want to say, okay, what does next year hold and what do we anticipate that’s going to look like and what is the capacity of my people to handle that?

When do we need to start hiring? How long does it take you to get an attorney up to speed? What does that runway look like for the hiring model? Because it’s critical to have that in place so you’re not on the backend trying to catch up. The other thing I would say if you have not looked at your budget or started your budget, you’ve got a pretty good sense of where your firm is going right now as of the end of Q3 going into Q4, you should have a pretty good sense of things to be able to say, this is where we think we’re going to finish, but you need to actually look into what’s going to happen next year from an expense perspective. I know so many clients, especially those on a cash basis tax paying system, are going to get into November and December and want to spend all that excess cash. They don’t want to pay taxes on it, but you still have to get through next year’s expenses too. So making sure that you know what that budget’s going to look like. Specifically, what does Q1 hold for you next year? Are there big, does your malpractice hit at a weird time? There are so many big numbers that are going to come in and hit your cash all at once and you do not want to have spent a whole bunch of it to save 20% on taxes and now you’re struggling to cover the bill.

Christopher T. Anderson:

To me, that’s always been a lot of people and I’m glad to hear you say it and maybe you can speak more to it because I’m going to ask a follow up question there. I often hear about this desire, I’ve been in business for 28 years about people spending down in the fourth quarter to avoid taxes and I’ve really never bought into it myself because it’s just a timing game, but now I’m going to pay taxes on that next year. I’m avoiding the short-term pain by making forced and maybe not the best decisions for my firm. It reminds me, so my grandfather used to always say, which is that nobody ever went broke by paying taxes. You’re worried about saving, like you said, 20%. What stupid ass decisions are you making to throw money at things that are going to cost you more than 20% of that money?

The answer is a lot. What I see some people do, which is probably more smart, which is like prepaying some stuff like oh, I already, let’s say since this show is also co-sponsored by Clio, I already use Clio. I know I’m going to use Clio next year, so maybe on December 30th I’ll prepay next year’s Clio bill. Okay, maybe there’s some sense in that and that’s when you then turn your attention to what you said to making sure you’ve got enough cash now to get through the first quarter. But what do you have to say about this whole just general notion of spending down your profit? Is that something you recommend to your clients?

Danielle Hendon:

It depends, which is always the accounting answer, right? That’s a lawyer answer. Yeah. There are some really great tax incentives and things you can take advantage of as a business owner and I am a firm believer that business owners should take advantage of everything we can. Making sure whoever prepares your taxes, whether it’s an attorney, a CPA, an EA is comfortable with the gray space that you are dabbling in. So I will give you an example. One of our firms is forecasted to have a significant amount of cash at the end of the year. So we sat down and had the conversation of, Hey, have you maxed out your 401k? Have you done all of the personal finance things that you can run through the business that will bring your business taxable income down? And I think I gave this example on the podcast, but if not one of my favorite gray areas and some may disagree with me is having your kids on payroll and when it is defensible and they do something in the business, you can create a tax deduction for your business that is also completely defensible to the IRS.

And it is one of those ways to bring down that taxable income. If you truly have the cash, do not just spend the cash because it’s there. If you do not need that cash and you need a place for it to go, there’s ways you can invest it and also get a tax deduction or there’s ways that you can take advantage of payroll items and long-term retirement benefits to take advantage of bringing that number down. Now, should you go buy, and I’ve had a client do this a whole bunch of equipment or something at the end of the year just because it’s there and it sounds like a good idea, you might be setting yourself up for some really fun AR collections problems in the future if you didn’t think of where the cash is going to come from next quarter. So it is very much an it depends, I’m not against spending money in the fourth quarter.

It’s often depending on your business and how stable or how cyclical it is, it’s this time of year that you really get a feeling for where things are going to be and whether or not you can spend, so a lot of spending usually does happen in the fourth quarter and that’s okay if it is truly a return on your investment personally or in the business. And when I say personally, some of those personal perks that we talk about from a tax deductions perspective, those are going to happen in the fourth quarter too. A lot of times I’m not a huge fan of the prepaids because you’re really just kicking the ball you are unless you are, you’re anticipating a huge downsize next year where it makes sense to bring one year down. The other year is going to be down. That’s a different story, but otherwise you’re really just kicking the ball and now you got to figure out if you can prepay it next year or you’re going to be paying for that instead.

Christopher T. Anderson:

Right. I think Rob’s got a couple of questions, but I want to just follow up on one thing you said because said about buying equipment, are all equipment purchases expensive and will they all reduce your taxable income dollar for dollar?

Danielle Hendon:

I’m going to give the CPA response of that depends on your tax situation and the CPA that you’re using and what you are specifically filing with. A lot of times, yes, you can get a dollar for dollar on when you’re writing off the depreciation in the first year. There are a lot of examples of that being possible. It is not always a guarantee though.

Christopher T. Anderson:

Right. So you should, and we’ll now give the general caveat here that neither Danielle nor I nor the unbillable hour is giving particularized tax advice on this show. We’re talking about generalities and everything we’ve said should be cleared through your tax advisor, not by what we said. We’re giving very generalized thoughts and concepts here, but they’re not particularized to anything that you’re doing. If something we say gives you a great idea, fantastic, run it by your professional tax advisor.

Danielle Hendon:

Absolutely. Because even though the rules are the same for everybody, different tax advisors have different comfort levels. I know some tax advisors that will not write a meal off for nothing and I know others that want to have every receipt for every meal you’ve taken in your life.

Robert Leitner:

Okay. You stole one of my questions, so dam it. Danielle, as we start, we’re going to enter Q4. Everyone should be doing their strategic planning for 2025 as Christopher is speaking about. Lots of questions I receive are regarding how to create your budget and as you know, most small to medium law firms use QuickBooks online or something similar. So with respect to how to get started, I’d like to know your recommendations regarding budgeting versus forecasting and in terms of actually implementing the budget and QuickBooks, whether you recommend using an import or the new sync feature or just plain old copy paste and what are your best practices to get this started for the newbie?

Danielle Hendon:

So I’m going to start by saying I’m not the biggest fan of the budget feature in QuickBooks, we use a completely different tool for our clients that syncs with QuickBooks. It is an additional expense, but it allows us to do what I call bottom up budgeting, which if you are a small business and aren’t doing tens of millions of dollars, you want to be bottom up budgeting. You want to know, and we’ve got a reveal, your path to profit kind of freebie that I can send over to you guys and you can share with people if they want it. But really you want to know what is the every single expense that’s going through your books. What is the cell phone bill? What’s the electricity bill, what’s the Clio bill, what’s the malpractice bill? When do all of these things hit? And you want to actually detail those out and then figure out which account they go in and what that totals up to.

Unlike many people, I honestly use the term budget and forecast sort of interchangeably. To me a budget should never be set in stone. It’s always going to be updated, it’s always going to be looked at. And in that term you’re looking at a forecast, we’re constantly updating that budget or forecast to address whatever’s going on. In small business, the slightest shift can have the biggest impact. Losing an attorney means we’re going to rewrite our whole capacity model. If it’s going to require us to refer people out, it’s going to mean we need to make changes. And from that perspective, I think it’s really important to understand, not top down but bottom up. A lot of people will budget in averages, they will look at their account, they’ll average it out and that’s what they’re going to put for their budget. That doesn’t account for any increase or trajectory or growth.

B, it doesn’t account for your expectations. So with almost every single one of our law firms, even those that use flat fee, we use a budgeting term I call capacity modeling. So what is your expectation of billables from your associates and paralegals based on that expectation and any seasonality or trend that needs to go into that? We are going to budget revenue. So when revenue comes in high or low, we know to go look at utilization and say what happened? And we know when to go look at utilization and say what happened? And then on the expense side, no two years are going to be the same. You’re going to have a lot of similarities, but if you’ve got a different amount of attorneys, your malpractice is going to be different. Your Clio subscription is going to be different, your insurance is going to be different. You need to look at what is different next year and not even just next year, because again, I’d never set and forget a budget. We’re updating ’em every single month with clients when things happen in the business. You’ve got to go reflect that in your budget, whether it’s additional phones, additional PCs, all of the things that happen as you grow as a business owner.

Christopher T. Anderson:

Excellent.

Robert Leitner:

That’s great advice, thank you.

Christopher T. Anderson:

So I wanted to drill in on one of those areas because you said it at the beginning, but then you said you really got to pay attention to expenses, which I don’t disagree with anything you’ve said, but the first thing you said, and I don’t think we gave it enough time, was, I don’t remember your exact words, but you talked about your hiring model and I think you’ll agree with me that a lot of law firms, a lot of law firm owners, they hire when a times are good and they’re like, Hey, maybe add a couple people here, make my life better. Or when they are absolutely stretched beyond breaking and then they’re like, oh my god, I’ve got to get another lawyer in here or another paralegal,

Danielle Hendon:

Then you don’t have time to be looking for ’em,

Christopher T. Anderson:

Then you don’t have time. But the very, very few people work on a hiring model that says, okay, in 2024 I expect we’re going to end up at let’s say a million dollars total gross revenues and I want based on focused my personal financial needs or how many clients I want to serve or this practice area I’m going to add or this whatever we were going to grow to 1.25 next year. And then coming back and saying, okay, are we going to have to hire someone to do that? So can you talk a little bit about how to, because let’s face it, most of your clients, most law firms payroll is somewhere between 50 and 70% of gross revenues. There’s about half or more is walking back out the door with your people. So if you’re going to manage and you’re going to predict expenses, you better damn well be able to predict your payroll. So how do you advise your clients to put together a hiring model?

Danielle Hendon:

So we take a very similar approach to that capacity-based modeling. I was just saying from a revenue perspective, but you’re going to do it backwards. So instead of saying how many hours is everybody supposed to do, what’s their billable rate and coming up with your revenue number, you’re going to say, what is our revenue target? If everybody’s doing all of their hours, how much revenue does that generate and does it make it to the target or are we going to need somebody else to get us there? And then the other side of it from modeling out for 2025 is going to be at what point are we going to need that somebody? So figuring out when do you anticipate the growth for this happening? Is it going to be straight line over the year, we’re going to hit the ground running in January and we’re going to have 20% more revenue?

Not the most likely scenario. You’re probably going to ramp up to that 20% increase, 25% increase. So to get there, how do you ramp up? Is everybody already at capacity? If they’re already at capacity and that’s what gets you a million dollars, then you’re not going to be able to get much further than that without hiring. And I always tell every client we have, but specifically attorneys and professional services in general, while someone is billable and revenue generating and it’s almost always an easy hire to figure out breakeven calculations and minimum billables needed, they are not going to be full-time revenue generating. The minute you hire them,

They’re going to have onboarding and training and you almost need a three month buildup for that attorney to really be the revenue generating attorney that you want them to be. So that means we need a three month runway before we even start to progress to that 25% increase that you’re looking for. And that’s just one attorney. Does one attorney get you that 25% increase? Are you going to need two? I don’t recommend doing it at the same time because as a business owner myself, that’s a lot. But getting one of them in the door, getting them trained up and then getting another one in the door, and it’s really about modeling it out just like we model revenue and saying, does this get us there?

Christopher T. Anderson:

And so from what you’re saying then what you’re talking about is basically like let’s say, alright, so in order to hit 1.25 and to keep with my example, we need the first new attorney to be on board to be producing by July 1st, which means we need them to start no later than March 1st, which means we need to get an offer out the door February 1st, which means we need to be recruiting December 1st. That’s what you’re talking about, right? It’s like you got to walk it all back from the day. I want revenue. That’s

Danielle Hendon:

A huge window and it means basically tomorrow you need to be doing this now if you want to hit that goal next year.

Christopher T. Anderson:

Yeah, I think that’s really, the recruiters are loving this. They’re like, yeah,

But if you actually, here’s the thing. If you plan this way, you might not need to pay the professional recruiters because you’ve given yourself the timeline to get this done. Though I’m not saying you shouldn’t hire professional recruiters, that’ll be another show for another time. But regardless, the point being is that this planning is not just about filling in a spreadsheet and putting it into QuickBooks. It is about making decisions about when we’re going to start recruiting seven months before I need those revenues to show up. That’s a huge, huge shift in a lot of people’s thinking and mindset

Danielle Hendon:

And make sure you’re maximizing current utilization. There are so many of our firms, especially coming out of the summer season that are revisiting utilization and what is everybody’s billable hours and are we going to, whether you’ve got an annual number or a monthly number, whatever that is for your team, it is absolutely critical to have an expectation otherwise they don’t even know what they’re aiming

Christopher T. Anderson:

For. Sure. How can you hit your target if you don’t know what it’s,

Danielle Hendon:

And if they know what they’re aiming for, then being able to have those conversations around utilization. Because if you’re not maximizing, I’m definitely not going to say go higher because you need to maximize what you have first.

Christopher T. Anderson:

Alright, we have a question from the audience staying with our theme on the, regarding coming into the fourth quarter here. They just want to know what are the most common mistakes you’ve seen from businesses, law firms, or other professional service businesses this time of year? I think we brought one up, which is possibly spending down the money, but can you think of any other that where maybe some short-term thinking is replacing long-term or any other big mistakes people make here at the end of the year? I’ve got one in my mind, but I want you to see what you’ve got.

Danielle Hendon:

The taxes and spending money just to save money that’s not actually saving money is probably the biggest one as well as, like I said, kicking the ball that prepaid, unless you really don’t think you’re going to make as much money next year, which I would challenge anybody who thinks that unless they’re downsizing and closing and whatever, is just kicking the ball and making your life more difficult next year. The other thing that I tend to see in the fourth quarter, and this is more from a budgeting ahead of time, especially those that want to do things based on averages. Your fourth quarter is probably going to be a little bit different than your other quarters. There are a lot of holidays, a lot of vacations, a lot of downtime in that fourth quarter. If you are using, whether it’s flat fee or billable hour, your people are probably not working quite as many hours as they did in let’s say Q1 and Q3, Q2 usually has some summer bump in it too, but people tend to anticipate what their revenues will be in Q4 based on the trajectory that they’re on and forget that people are going to be out in that fourth quarter.

Christopher T. Anderson:

Good thinking. Yeah, be aware, look at prior performance or even just think about what your team’s doing differently in the fourth quarter. I think that’s a huge, huge miss that people can have. The other one just is from my perspective, just to finish answering this listener’s question for me, one of the things is just failing to do what we’ve just been talking about altogether, failing to plan, rolling in and coming up to December going like, well, we’re just going to keep on rolling. Things have been good, we’re going to keep on trucking and we’ll take the changes as they come. So for me, one of the biggest mistakes that law firm owners in particular make in the fourth quarter is not paying attention to the fact that it’s the end of the year and not doing this end of the year planning and new fiscal year budgeting. Now, if some of your clients, Danielle, like you said, we’re updating the budget every month, well that’s great and it probably mitigates the damage that could be done by failing to do end of year planning. But for me,

Danielle Hendon:

But we’re still going through end of year, we’re redo the expense review, we’re redoing the revenue. You’ve got to look at the whole year.

Christopher T. Anderson:

Yeah. Because what’s happening is when you’re doing these updates on the budget, that’s very tactical, that’s going like, okay, we said this was going to happen, it changed. And so we’re going to adjust, we’re reacting to change, making sure we stay between the guardrails that we set, but once in a while you got to get strategic and say, well, what are the guardrails? What do we want to do? Are we happy with the growth we’ve had? Do we want more? Do we want less? We were smaller, we grew a hundred percent. Do we want to keep that up or do we want to get growth to a level that we want to sustain without some of the growing pains that can come? So yeah, having that strategic thinking, don’t rely just on the tactical thinking because what’ll happen is you’ll end up somewhere you never planned to go and whether good or bad, I mean you should think about it and plan about it, right?

Danielle Hendon:

Rob what you want? We just had a client sell off a portion of theirs just so they could downsize because they didn’t want to manage that many people anymore.

Christopher T. Anderson:

Yeah, happens.

Danielle Hendon:

The other thing is, you were talking, Christopher, that came to mind is if you didn’t hit your targets this year, some people will get the urge to just throw in the towel. You still have a whole quarter left to generate momentum for 2025. It is not over in Q3, but I know so many people might see that number and be like, now we’re going to hit the holidays and we’re going to do all that. What you do in these next three months is going to be the momentum you carry into next year.

Christopher T. Anderson:

Yeah, I think that’s great. And you know what? You can eat the people’s lunch you are throwing in the towel and bring it to ’em

Robert Leitner:

For Q4. You could either look at it as the end or the beginning. So yes, sure it’s the end, but it’s also the beginning of the next year and that usually is a filled with opportunity in my experience. So it’s a good time to look at as well.

Christopher T. Anderson:

Alright, that’s where we’re going to wrap the show. I’m sure people have a lot more questions for Danielle, and like Danielle said, go catch the episode that she’s in. I will. But I do want to thank you, Danielle for being here and just to remind everybody so they can find that podcast and they can find Danielle. Danielle is the founder and owner of Four Corners CFO, and this is a firm offering financial advisory services to small business owners, not just law firms, but she’s got a lot of law firm clients and she knows the law firm business model. So Danielle, thanks so much for being on the community table and answering our folks’ questions.

Danielle Hendon:

Thanks so much for having me. This was a blast.

Christopher T. Anderson:

Our absolute pleasure, Rob. Thank you as well. Rob Lightner has been given some fantastic advice with Rob. Thanks again for being on the show.

Robert Leitner:

Thank you.

Christopher T. Anderson:

You betcha. And of course, this is Christopher Anderson and I would invite all of you to join the community table. Remember, you could be on the community table live every third Thursday at three, and all you have to do to join is you can look it up the community table or just go to legal talk network.com and you can sign up to be on the show right there. And you can also catch all our back episodes and all the episodes of the Unbillable hour. You can subscribe to all the additions of this [email protected] or on iTunes.

Announcer:

Thank you for listening. This has been Unbillable Hours Community Table with Clio on the Legal Talk Network.

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