Is your firm focused on traditional bookkeeping to run your business?  If so, you may be missing out on maximizing profits and creating predictable cash flow.  Not convinced?  See how Sophie, a managing partner at her law firm, was lulled into thinking her firm was growing only to find out the firm was barely breaking even.

While these stories are based on real situations, the characters and details are fictitious.  Any similarity to any person living or dead is merely coincidental.

Scenario:

Sophie has been running her own legal practice for over 15 years; she has 2 associates and a legal assistant (Tania) who doubles as the firm’s bookkeeper. Tania is exceptional at entering the financial information Sophie provided her. Tania keeps track of billing, prepares the firm’s monthly invoices, enters all the expenses and runs payroll each month. She also runs basic reports for Sophie each month.

At the end of the year, Sophie was thrilled that her practice was thriving; she was running and growing a highly profitable business. With the success of her small firm, she planned to add another associate attorney and a paralegal for the following year. Sophie asked Tania to evaluate the financial impact of such additions on the next year’s financial budget/forecast.

Sophie started to notice some discrepancies in the standard reports prepared by Tania and was confused about why some expense invoices she approved were not showing up on the profit and loss statements prepared by Tania. After some digging and again reviewing the month by month reports prepared by Tania, Sophie discovered the following: the line for payroll taxes had been omitted; some reports were missing the monthly rent payment; and, the line item for “miscellaneous” was higher than the payroll figure.

As Sophie and Tania kept digging, it became apparent that the numbers were not adding up. Sophie noticed that the in the past 11 months, the monthly rent was paid only 9 times; payroll taxes had not been paid; and the miscellaneous category made no sense! Despite her best efforts, Sophie could not figure out whether her law firm was profitable or not!

Core Issue:

Sophie’s firm is not unusual, and it can take years to recognize the numbers are not correct. Sophie could have easily solved this problem by hiring a finance expert to set up structure and process with a monthly review.

1. Lack of Structure and Process. While Tania was an exceptional data entry person, the QuickBooks chart of accounts was never set up in a manner to support Sophie in running the business. Sophie and Tania didn’t even consider categorizing each invoice so that it could be easily tracked and analyzed. When setting up the process, a financial expert would first talk with Sophie to identify how the business works and what reports will be needed so that a structure (chart of accounts) can be set up. Then, each financial transaction will have a category (an account within the chart of accounts). Sophie and Tania will identify the category and Tania will then enter the transaction into the system. Each month, reports will be run and both Sophie and Tania will review for accuracy and performance.
2. What is Cash Basis. Sophia’s firm’s financials are reported on a cash basis. Tania thought that meant bills were paid when cash was available and that the bills were not entered until they were paid. The result of this confusion was that over $75,000 in accumulated expense invoices were sitting in Tania’s “to be paid” folder. A cash basis means that only those invoices collected and those bills paid will show up on the monthly report. HOWEVER, you still enter all the bills and invoices so that the accounts payable, accounts receivable and balance sheet reports show the outstanding bills. Without having all transactions in the system, there isn’t a way to see the full picture.
3. No Expertise. Sophie is a lawyer and not a finance person—she assumed her firm was financially healthy and that the information reported to her accurately reflected the financial condition of her firm. She thought her firm was doing very well. However, when she started to dig, she found out that her financials over the past two years were in shambles and that she would need to restructure the entire financial and accounting system in order to understand if the firm was breaking even. Sadly, this is all-too-common and restating financials can be quite costly. Sophie had to pay a finance person, a bookkeeper and likely her accountant to restate prior tax returns. In fact, she may owe a different amount to the IRS than she previously thought.

Solution:

1. Correct “Sloppy data in” Means “false data out.” Managing the finances requires a financial expert who is familiar with the business of a law practice. This expert can help the law firm set up the best processes for that firm; develop a chart of accounts so that reporting makes sense; properly and timely account for all expenses regardless when the expense invoice is actually paid; close the books every month; and hold a monthly meeting to review the past month to accurately forecast the next few months with a focus on cash flow.
2. Implement Structure and Process. While a bookkeeper can be great at managing and keeping track of billings, invoicing, collections, expenses, and generating basic reports for your business, bookkeepers are more effective if a process and structure are agreed upon up front.
3. Oversight Required. To truly understand your law firm finances, a financial expert is critical and can easily make the difference between financial stability and stressful nail biting when you find out your bookkeeper is just doing data entry and holding bills on their desk.

 

Financial Partnership.

Having a great finance partner, will allow you to:

• Keep your bookkeeper and provide them with a meaningful process
• Trust the financial data and reports you receive
• Run analyses so you can make better decisions: hiring, expenditures, relocating the office, computer hardware and software upgrades, or paying bonuses.

 

Bookkeeper Vs Finance

	Bookkeeper	Finance
Record revenue and expenses	√	√
Develop Classifications	√	√
Enter data into software such as QuickBooks	√	√
Run basic reports	√	√
Design effective chart of accounts		√
Analyze Finances		√
Interpret Financial Condition		√
Create performance metrics		√
Develop Cash flow reports and forecast		√
Advise Managers for better decision making		√
Develop Budget & Forecast		√
Work with financing vehicles to assist with consistent cash flow		√
Develop analysis for new business opportunity / new hires		√