You've built up considerable experience working for a large law firm. Now you're ready to fulfill your lifetime ambition by starting your own practice. While you relish the freedom, you also understand you can no longer rely on a large support staff to manage the day-to-day responsibilities of running the business.
From here on out, it's your business — and your responsibility. Here are three things that are critical to keep an eye on.
1. Trust Accounts
We've listed this No. 1 for a reason (in fact, there's an entire Supporting Strategies blog post devoted to the topic). Every bar association has a zero-tolerance policy when it comes to errors involving trust accounts. If your trust accounts aren't appropriately reconciled or the record-keeping is not clean — meaning that you can't attribute the full balance to every individual client by dollar amount — then your state bar will sanction you and take your license. And the bar can conduct an audit without warning, at any time.
2. HR Functions
In many ways, starting a law practice is no different from starting any other small business. You have to determine how many employees you need, develop an onboarding process and choose a payroll service.
But unlike many other small businesses, law firms also have to determine which employees' time needs to be billed to which clients, at which rates. Let's say, for example, your firm needs to conduct some research for a case. Are you charging a fixed fee or billing hourly? If you charge a fixed fee, then the research would be included in the total price quoted for the case. If you're billing hourly, then you need to determine not only which rate to charge the client but also which rate to pay your researcher. Most lawyers use standard billing rates for different levels of service — partner, paralegal, researcher, administration, etc.
3. Maintaining a Healthy Cash Flow
Perhaps the greatest challenge for a new law firm is making sure to charge the appropriate amount upfront. The biggest complaint that people have about lawyers is the size of the initial deposit, often upwards of $10,000, just to start the case. Because of that, a beginning law firm might be tempted to low-ball the initial deposit to secure the business.
But there's a reason for those large deposits, and it goes back to the stringent requirements of trust accounts. Cases can take months to resolve. As the head of the firm, you need to ensure you pull the right amount of money at the right time from each trust account to cover the expenses you've incurred, such as payroll. Moreover, you have to begin with enough available cash and maintain a certain level of profitability to cover expenses that aren't directly billable to a particular case, like office furniture.
Maintaining adequate cash flow is also vital for your long-term growth. You must have the resources to scale successfully and not overwhelm your staff or yourself.
Getting a Head Start
Fortunately, law firms that are just starting today have the luxury of case-management software to help them navigate these challenges.