Budgeting for Law Firms: Practical Tips for a Stronger Year Ahead

Budgeting is often viewed as a financial exercise – something you do once a year, tick off the list and move on from. But in the legal sector, a well-crafted budget is far more than just a spreadsheet. Done properly, it is a powerful tool for decision-making, accountability and growth. Yet many law firms still approach budgeting by defaulting to last year’s figures, adjusting slightly for inflation or anticipated changes, and calling it done.

The legal industry is evolving. Clients are becoming more cost-conscious, competition is increasing and work patterns are changing. In this environment, a thoughtful, forward-looking budget can be the difference between surviving and thriving.

Why budgeting matters

Let’s begin with the “why”. A good budget gives you a roadmap for the year ahead. It helps your team stay focused, your leadership stay aligned and your firm stay profitable. It also helps you:

• Make better decisions – with clear financial visibility, you can invest in the right places and avoid costly surprises.
• Set realistic targets – so people know what’s expected and how they’re contributing.
• Support growth – by identifying where and how your firm can improve performance.
• Plan Partner drawings and cash flow – with better accuracy around profit share and tax reserving.
• Celebrate genuine success – when goals are met, you’ll know you’ve earned it.

Most importantly, budgeting is an opportunity to look at your business with fresh eyes – to ask the right questions and shape the future, not just react to the past.

Here are some practical tips to help set your budget on the right path.

1. Start from scratch—Don’t rely on last year’s budget

Many firms start budgeting by looking at what they did last year and tweaking the numbers. It’s understandable – familiar, quick and seemingly safe. But this approach assumes everything will stay the same. It rarely reflects changes in your team, client base, new opportunities or market conditions.

Instead, start from a clean sheet and ask:

• What’s changed since last year? Team structure? Caseload? Office space?
• Who is joining or leaving the team?
• How many hours are available for client work?
• How much of that time is likely to be chargeable?
• Are our expectations reasonable?

Review your assumptions around chargeable v non-chargeable time. Are you setting realistic targets? More importantly, are you holding people accountable for meeting them? Your team is your biggest asset – understanding how they’re working and how their time converts into income is key to building an accurate, effective budget.

2. Understand what you can bill – and at what rate

Once you’ve established how much time is available, look at how that translates into billable income.

• What proportion of time actually gets billed?
• What are your current charge-out rates?
• Are they competitive in your market?
• Are your recovery rates healthy?

This is where many firms leave money on the table. For example, you might have a solicitor charging £350 per hour, but if you’re only recovering 70% of the time worked, the true rate is significantly lower. That could indicate poor time recording, underpricing or inefficient matter management.

For firms using fixed fees, this is also a good time to review whether those fees still reflect the value of your service. Have your costs increased? Has the work become more complex? Fixed fees may offer clarity to clients but if they’re not regularly reviewed, they can erode profitability over time.

3. Factor in inflation and market conditions

It is easy to underestimate the impact of inflation. Even small increases in staff costs, rent, utilities or IT subscriptions can significantly affect your bottom line. Make sure your budget accounts for realistic price rises – not just for your costs but also in the fees you charge.

Also, take a moment to look at what’s happening in the wider market:

• Which practice areas are growing?
• Are some sectors slowing down?
• What trends might affect your workload in the next 12 months?

If you work in unpredictable areas like personal injury or dispute resolution, budgeting can be trickier – but not impossible. Look at your pipeline. What’s likely to convert into revenue this year? Build in some conservative estimates so you’re not caught off guard.

4. Know your costs – especially your team structure

For most law firms, salaries are the biggest expense. So getting your team structure right is essential. You should be asking yourself:

• Do you have the right mix of senior and junior lawyers?
• Are your support staff enabling fee earners to focus on client work?
• Are there areas of inefficiency or duplication?

Also consider planned salary increases, recruitment costs and changes to National Insurance, pensions or the living wage. These can have a major impact, especially for firms with large support teams or multiple offices.

Beyond salaries, look at your operating costs. When was the last time you compared quotes for insurance, legal software, utilities or training providers? Small savings across multiple areas can add up quickly. Don’t assume you’re getting the best deal – take the time to check.

5. Plan for capital projects early

If you are planning to invest in new IT systems, office renovations or even expanding into a new area of law, build these into your budget from the outset. Get quotes early and make sure the investment aligns with your strategic goals.

Capital projects often bring short-term costs but long-term benefits; improved efficiency, better client experience and greater scalability. By budgeting properly, you avoid nasty surprises and can plan cash flow to support your growth.

The upside of a strong budget

So, what’s the real benefit of all this effort?

It’s not just about cutting costs or setting targets. A well-thought-out budget opens up opportunities:

1. Improved team engagement

When everyone understands the firm’s goals and how their work contributes to them, engagement rises. Clear targets and transparent expectations help create a sense of shared purpose. Regular financial updates linked to your budget keep people informed and motivated.

2. More confident decision-making

Want to hire a new fee earner? Launch a new service line? Open another office? A good budget gives you the information and confidence to say “yes” – or “not yet”. You’ll know where the opportunities and risks are and whether you can afford to take them.

3. Better partner planning

For partnerships, a solid budget allows for predictable monthly drawings, better profit share planning and more accurate tax reserving. This reduces surprises and avoids short-term cash flow problems later in the year.

4. Increased profitability

By identifying inefficiencies, underperforming areas or missed opportunities, you can take action early – boosting profitability without necessarily working longer hours or taking on more risk.

5. Stronger firm reputation

Clients, banks and suppliers all take notice when a firm is well run. A solid budget shows you’re in control, thinking ahead and managing your practice professionally. That inspires confidence and can help with everything from client retention to securing funding for growth.

Final thoughts: Your budget is effectively your business plan

At its best, a budget is not just about money – it’s a reflection of your goals, your values and your ambition. It helps you focus on what matters most, take control of your financial future and lead your firm with clarity and confidence.

So this year, give your budget the time and attention it deserves. Build it from the ground up, challenge your assumptions and involve your team. It’s one of the most valuable tools you have – and when used properly, it doesn’t just guide your year – it has the potential to transform it.