Understanding Your Financials

Law Firm Financials

When Growing A Law Firm, One Of The Most Important Things You Can Do Is Understand What Your Financial Statements Are Telling You

Understanding your law firm’s financials will help you spot trends, make decisions, and be more profitable because you will be more proactive in making changes.

Here’s an overview of three of the most informational financial reports in your legal accounting. We recommend viewing and analyzing these reports at least once a month, if not more often.

Balance Sheet

This is a snapshot of what your law firm owns and owes at a specific moment in time. Your balance sheet contains critical information about the financial health of your firm.

What your balance sheet shows:

• Assets. An asset is what you own

• Liabilities. A liability is what you owe

• Equity. This is what is left over and due to owners

Income Statement

This statement, also called a profit and loss statement, is an essential part of gauging the operating performance of your law firm. It is a detailed statement reporting the various expenses of running your firm, showing the net profit you made over a specific time.

This statement can provide a lot of information to you such as gross profit, net profit, what you spend in certain categories, etc.

The most valuable information can come from trend analysis where you are analyzing changes over time. This can show when revenue increases or decreases by month, or if net profit is trending up year after year., etc.

Seeing And Reacting To Trends Can Be Profitable. This Is Why It Is Crucial To Have Accurate Legal Accounting Records.

Once you have been operating your law firm for a few years you can use past records to create accurate projections of profits for growth for the future. These projections can serve as goals for your firm and help you review your income trajectory throughout the year.

Accounts Receivable

The A/R Aging is a report that lists unpaid client balances by date range. It is used as a tool to identify which payments are overdue and haven’t been collected.

Additionally, this report can help you identify bad debts (we hope you have none!). Always try to keep debts in the 0-30 day bracket because chances of collecting this payment get lower as you move right through columns. Or, change up your accounting policies where client’s pay upfront. Then you’re never chasing money!

All of this may seem like a lot to take in. It’s okay for it to be daunting at first, however, with a little bit of time and help, it definitely gets easier. I recommend making it a priority to review your law firm’s financials regularly, ask questions, and make sure you understand what story they tell.  

Aligned CPA helps solo and small law firms. We’d love to talk with you and see if we would be a good fit for your firm. Contact us for a consultation today.