These items can help you identify errors while they are still relevant.
Financial reports are crucial to the longevity of your law firm. When you invest the time and energy into completing them, you can identify your strengths and weaknesses, and come up with ways to increase productivity and profits.
“Solo and small firms are law practices, but they are also businesses,” says Annette Fadness, President of Juris Bookkeeping. “A law firm is a business, first and foremost. If the financial health of the business isn’t monitored, the firm can fail.”
To come up with your financial reports, you first need to detail what should be inside of them. What do you need to cover on a daily, weekly, monthly or yearly basis? That’s where a checklist comes in handy.
The following are some of the items that should be on your financial report checklists, suggestions for how often to generate your reports, and the benefits of consistently producing them from accountants and consultants themselves.
At the end of every month, you should do an accounting process and compliance due date checklist, according to Maggie Kennedy, CPA and Consulting Senior Manager at EKS&H.
This checklist will monitor that specific tasks are being completed by their due dates. It’ll also guarantee that, “any compliance items like sales tax, 1099s, and personal property tax returns are completed on time to avoid any late filing or late payment penalties,” says Kennedy.
Your firm should be compiling a checklist and completing a profit and loss statement, also known as an income statement, on a monthly basis.
According to Fadness, this report should highlight the actual income you received and the expenses you paid. “It’s best to look at this not just for the current month, but in a year-to-date format and also a prior period comparison,” she says. “This will give you a sense of how your income and expenses are trending. If you’re faring worse than in prior periods, you’ll want to dig into the reasons why.”
Another monthly report you should keep track of with your checklist is your balance sheet. This is a list of your assets and liabilities and your equity position, which is your assets minus liabilities, says Fadness.
You should look at your balance sheet in a way that shows a year-over-year comparison to see if your firm is doing better or worse. “If your assets have increased and your liabilities decreased, your firm is healthier,” says Fadness. “On the other hand, if things have gone in the opposite direction, you’re less healthy.”
On a weekly or daily basis, it’s important to generate a cash flow projection report, says John Schweisberger, Executive Director, Consulting at Armanino LLP. Within the checklist for this report, you should include expenses you know you’ll have to pay like rent and health insurance.
“Projecting cash flow is really helpful when it comes to anticipating and managing the distribution [of money],” says Schweisberger. “I had a day-by-day projection of an entire year, and it was maintained on a daily basis with whatever changes there might have been. I looked at where our crunch points were. I know as I approached them what steps I’d have to take so there weren’t any surprises.”
A recent study by Clio found that on average, lawyers log 2.2 out of 8 hours of billable time every day (the utilization rate). The realization rate, which is how much they bill, is 1.8 hours per day, and the collection rate is 1.5 hours per day.
Fadness recommends producing your own utilization, realization and collection rate report every month. Then, you’ll be able to pinpoint whether your firm is billing for enough time.
“You can identify people who lag behind getting their time entered into the system,” says Schweisberger. “The longer you wait, the more likely you are to miss time you should have billed.”
You also need to ensure that your weekly checklist includes an accounts receivable detail report. According to Fadness, you can go into QuickBooks or your billing and time software and look up all of the unpaid client bills, as well as how overdue they are.
Fadness also notes that small firms must have an office policy for following up with clients that are slow to pay. They should be getting contacted on a weekly basis. “This will increase cash flow and reduce the likelihood of your firm getting stiffed,” she says.
Your accounting department should not only be coming up with checklists and reports for your firm. They also have to analyze what’s going on and come back at you with insightful commentary.
“[The accounting department] needs to draw leadership attention to the issues that matter,” says Schweisberger. “They can’t just produce the reports and let management figure out what they have to do. It’s not helpful to the managing partner or executive committee, which needs to be focused on taking action and making decisions — not being business analysts. They were trained to be really good attorneys.”
When you know how your firm is doing financially, and you dedicate the time to filling out your financial reports, you will only reap the benefits.
“Following a financial reporting checklist helps to identify and correct errors or inconsistencies while they are still relevant, improves timeliness of collections, ensures vendor relationships are protected by reviewing and paying outstanding bills, adds a level of control to your financial processes, and ultimately leads to more accurate and timely financial reporting,” says Rebecca Kelley, CPA and Partner at EKS&H.
Your firm will also be more confident in your decision-making by having thorough and accurate information about your finances, says Schweisberger. “If the owners aren't confident about the future of the firm, that will come through to employees loud and clear. It can start to splinter a firm really quickly.”
You won’t only be more secure in your decisions, but you can make better decisions in general. “No one likes to wing it when dealing with their own money or other people’s money,” says Schweisberger. “No one likes to deliver bad news when a decision didn't work out either. But you need to have good control over the [financial] information.”
When you figure out your firm’s finances and come up with a strategy to tackle any issues, Schweiserberger says you’ll have a sense of order in your firm. “The practice of law is chaotic enough. The accounting department doesn't need to make it worse.”
Rebecca Kelley, CPA and Partner at EKS&H, will present on this topic at this year’s Annual Conference & Expo in Denver. She’ll help you build the checklist of critical tasks that are essential for well-managed financial reporting. Learn more here.