No matter what you do for work or your status in life, this is a stressful, worrisome time. The Coronavirus is spreading across our Country and businesses have been closed by government order and those still operating are under restrictions. This has led to widespread layoffs, pay reductions, and uncertainty. To say there is some additional stress in my life would be an understatement.
I am spending my days talking to clients about their now closed, or their very restricted business operations, and how they can deal with it from an employment and financial perspective. Two months ago, I don’t think many people expected businesses to close as they have, and people didn’t expect to be out of work. The cash crunch at many small businesses may create a situation where many don’t reopen. There are even large companies, such as The Cheesecake Factory, that are reportedly already telling landlords they are not paying their rent.
Glancing at the legal news you can see large law firms laying off, reducing hours, or furloughing staff; cutting the pay of attorneys by 10% to 25% or more, cutting partner pay from 50% to 100%, and stopping matching of retirement savings. Speaking with colleagues, small firms and medium sized firms are hitting the same obstacles.
Law firms are a service-based business and typically our largest expense is salaries for attorneys and staff. For the last few years, we have been experiencing a generally great economy that is growing, or at least acting as if it is. When we have the wind at our backs it always seems easier to run, but the headwinds really slow us down.
We have been operating with the wind at our backs and are now hitting very strong headwinds. With all these quite substantial cuts, it appears the firms are really receiving no revenue, or they are in very bad shape from a cash on hand perspective. The firms could be making great forward-thinking cuts to ensure their long-term viability, but large cuts like that really look like it could be poor cash management.
What you need to do now
Since the economy has basically been directed to pull the emergency brake, it is showing the importance of emergency funds, for the firm and personally. The rule is to hold 3-6 months of expenses in an emergency account. Businesses should determine what their monthly bottom line expenses are after cuts and set aside at least three but target six months of expenses.
As a law firm owner or an associate, you need to personally set aside 3-6 months of expenses as well. If the firm has no revenue coming in the firm owner or partners need to have funds personally set aside. Without income it is similar to getting laid off from a personal income perspective. With unexpected cuts to pay or even attorney lay offs it shows the importance from an individual perspective of having 3-6 months of expenses set aside.
Typically, unemployment is not going to be enough from an attorney to breakeven, especially if they are making more than about $53,000 per year. Although there are exceptions coming through currently, typically firm and business owners don’t pay into the unemployment insurance system and it is not available for them. During this pandemic they are making exceptions for firm owners. It does make me question if going forward states will force owners to begin paying into the system because of events like these.
Take the time to create a plan to set aside 3-6 months of expenses in your firm and personally. When the winds shift and are behind us again it will make it much easier when they become headwinds again.