5 Financial Reports Law Firm Owners Should Review Regularly

In the legal profession, managing finances is especially crucial. Not only does the business rely on prudent financial management to maintain operations, but your clients also need you to be a good steward of their money. Understanding various statements is vital to ensure this. In this article, we break down some fundamental law firm financial reports, the information they provide, and how the information benefits your firm.

Financial Statements

The first three reports are financial statements.

1. Income Statement (a.k.a. The P&L / Profit and Loss Statement)

Focus: This statement is the most common report and is the one you likely know best. It shows the firm's revenues, expenses, and profits (or losses) over a defined period.

Usefulness: The P&L is crucial for tracking profitability and iden􀆟fying income and expense trends; good for making informed decisions on cost management or revenue genera􀆟on.

Review: Monthly or quarterly, to keep a close eye on profitability and opera􀆟onal efficiency.

2. Balance Sheet

Focus: The next most common financial statement is “The balance sheet”. It lists assets, liabili􀆟es, and equity which, together, show a snapshot of a firm's financial condi􀆟on at a specific point in 􀆟me.

Usefulness: The balance sheet helps law firms understand their net worth and financial stability. It can guide decisions on investments, expansion, or debt management.

Review: Quarterly or annually, to track financial health and support strategic planning.

3. Cash Flow Statement

Focus: The least known financial statement is The Cash Flow Statement. Your prac􀆟ce management so􀅌ware does not typically feature The Cash Flow Statement, but your bookkeeper can produce one. This statement provides informa􀆟on about the firm's cash in and out of the firm over a specific period.

Usefulness: Understanding cash flow is essen􀆟al for managing liquidity. It helps law firms ensure they have enough cash to cover obliga􀆟ons and iden􀆟fies when addi􀆟onal cash might be needed.

Review: Monthly (or even weekly!) to maintain a healthy cash balance and avoid liquidity issues.

Non-Financial Reports

The last two are not financial statements, but they are also very important for the law firm owner or stakeholder to be aware of on a scheduled, regular basis.

4. Client Trust Lis􀆟ng

Focus: A trust lis􀆟ng report details the funds held in trust for clients. It includes informa􀆟on on each client's trust balance and transac􀆟ons affec􀆟ng those balances.

Usefulness: For law firms, managing trust accounts accurately is not just good prac􀆟ce; it's a regulatory requirement. Common things to look out for in your trust lis􀆟ng include:

a. Nega􀆟ve Trust balance, where a matter trust balance shows that it’s overdrawn, even by a penny!

b. Inact􀆟ive Trust balances, where there has been no ac􀆟vity in a par􀆟cular mater’s trust account in over 12 months, yet there remains a balance.

c. Nominal Trust balances, where some􀆟mes there is a balance in trust of a negligible amount; par􀆟cularly if the mater is complete and the file is closed.

Review: Monthly, to ensure compliance with regulatory requirements and maintain accurate records of client funds.

5. Accounts Receivable (A/R) Report

Focus: This last report lists outstanding invoices and the length of 􀆟me they have been

outstanding. It typically categorizes receivables by 30, 60, 90, and over 90 days due.

Usefulness: The A/R report is crucial for managing cash flow. It helps law firms iden􀆟fy slow-paying clients, assess the effecti􀆟veness of their collec􀆟on processes, and forecast future cash inflows.

Review: Monthly, to stay on top of collec􀆟ons and maintain a steady cash flow.

Tip: Wri􀆟ng off any A/R balance that is deemed to be uncollectible at your yearend will help in decreasing your firm’s tax liability.

For law firms, financial statements are not just about numbers; they're a tool for strategic decision-making. By understanding and regularly reviewing these statements, lawyers and law firm managers can ensure their firm's financial health, compliance, and long-term success. Incorpora􀆟ng trust lis􀆟ngs and A/R reports into your review process adds another layer of insight and ensures compliance. This list is not exhausti􀆟ve, but it is a good star􀆟ng point.

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Keith Hill Jr. is the Principal at Bookkeeping Matters Inc (BMI). For over a decade, Bookkeeping Matters has been fulfilling bookkeeping needs for lawyers throughout Ontario and other provinces. As a former Legal Accounting professor, Keith has also positioned BMI as a premier provider of online legal accounting training. Specializing in several practice management software, Keith and his team can be contacted at: info@bookkeepingmatters.ca / 1-800-893-2820 / www.BookkeepingMatters.ca

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