Practice management tips for conducting a comprehensive year-end financial review that will help you take an objective look back — so you can move forward.
Financial Management for Your Law Firm
For many lawyers, financial management is the business area of practicing law that provides the most heartburn. It’s completely understandable. But it is to your detriment when you don’t understand the financial fundamentals better. Whether you can tell a KPI from an IRA, following these three tips will help you avoid financial trouble.
1. Hire financial advisors to aid you in better understanding your business.
Too many lawyers delegate responsibility to employees who have not been properly trained.
If you, as the owner, do not understand the financial processes in your firm, you will have a hard time finding flaws in your system or properly supervising it.
2. Be aware of potential landmines.
Checks and balances are key. A major red flag is having one employee who has all financial responsibility: check-writing, bookkeeping, trust accounting and reconciliation, as well as maintaining all communication with your financial partners and bank. Often, there is no ill intent on the part of the employee, just a lack of knowledge.
3. Analyze your cash flow.
Brenda Barnes, owner of B2 Management & Consulting, has this to say about law firm finance:
“A good system of cash flow management can spell the difference between a successful business and a failed one. You need positive future cash flow to meet your debt commitments. Strong cash flow management also provides the ability to invest in growth. Getting to a position of excess cash flow helps your company operate in a strategic, proactive way and can help keep you from operating on the defensive.”
Year-end is an excellent time to document your cash flow, prepare a cash flow budget, and look for areas of improvement. Here’s a financial review checklist you can use to ensure the process runs smoothly.
What Should a Law Firm Financial Review Include? Here’s a Year-End Checklist
Barnes provides an important checklist of items for law firms to review for year-end and to strategically maximize profitability.
Review realization rates and compare them with prior years.
Review client profitability to assist with determining billing rate adjustments.
Review attorney and paralegal billing rates to determine whether an adjustment is necessary. If so, establish a communication protocol with your clients to discuss.
Set timekeeper budgets including billable hours, collections and originations.
Review your general ledger and correct coding adjustments as necessary.
Review your profit and loss report. Where do you stand? If you have a larger-than-expected profit, are there any major purchases (investments in your firm) you should make now that can be depreciated? Make sure you have the cash. Talk to your CPA tax advisor.
Verify loan accounts and clean them up if necessary.
Reduce your receivables — follow up with clients to get paid.
Write off bad debt if necessary but work on getting paid first.
Make SEP IRA or 401(k) contributions and donations to charity to reduce taxable income. Talk to your CPA tax advisor.
Verify your 1099 information is set up properly in your accounting system. Ensure you have W-9s and Tax ID numbers for issuing correct tax forms.
Review year-end bonuses. Should you give these at the end of year or in January?
Look for fringe benefits you should report on W-2s. Some of these could include health and life insurance, transportation subsidies, moving expense reimbursements, educational reimbursement programs, and employee loans you’ve forgiven.
Create budgets for the coming year.
Check with your CPA for new tax breaks you may qualify for.
Scrub your balance sheet — verify all your account balances.
Review Other Stressors on Your Practice
Finally, consider how the current economy and other factors are affecting your practice and your well-being.
How is your area of practice performing? Are your clients able to pay their bills in a timely way? Are your rates supporting your practice?
How are your employees faring? Are your office protocols working? How stable is your remote or hybrid work plan? Is your compensation plan meeting their needs?
How is your personal mental health holding up? Do you have the support you need to continue serving your clients? Can you support and encourage your team members?
Too often in our busy lives, we don’t take time for reflection. Schedule a day to examine the ways the economy and other stressors have affected your firm. Ask your employees for input as their front-line communications with clients may reveal stresses or successes that you don’t see from your vantage point.
The Benefits of an Objective Look Back
Use a year-end review to see how your law firm performed and to make the changes necessary to strengthen your practice. With an objective look back, you can plan for moving forward.
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RESPECT: An Insight to Attorney Compensation Plans
Newly updated with more case studies.
Do you want to know more about designing and implementing compensation systems to grow and scale your law firm? Brenda Barnes and Camille Stell have written a go-to guide on attorney compensation trends and best practices for small to midsize law firms. Available at lawofficemanagementbooks.com and Amazon.
