Stell: Year-End Financial Review

The end of the year is barreling towards us – are you ready? If not, here are a few tips for tidying up your business year.

COVID-19 Impact

How has the pandemic impacted your law firm?

• Has your area of practice been impacted in a positive or negative way, are your clients able to pay their bills timely, are your rates supporting your practice?
• How are your employees faring?  Are you working in the office with pandemic protocols in place or are your employees working from home? Have you decided on your post-pandemic work force plan?
• How is your personal mental health holding up? Do you have the support you need to continue to serve your clients, as well as take care of your work force and your family and friends?

As Winston Churchill was working to form the United Nations organization after World War II, he is often quoted as saying, “Never let a good crisis go to waste.”

This is the opportunity to see how your law firm performed under pressure and to make the changes necessary to strengthen your practice. But a close examination of firm performance is required first. Too often in our busy lives, we don’t take the opportunity for reflection. Schedule a day to examine the pandemic impact on your firm. Ask your employees for input as their front-line communications with clients may reveal stresses or successes that don’t see from
your view.

With an objective look back, you can plan for moving forward.

Financial Management

A common theme I see in my work with law firms is their lack of supervision over financial matters and their lack of knowledge in firm finances (which contributes to the lack of supervision).

It’s completely understandable. Many of us went into law to avoid math. But it is to your own detriment that you don’t understand your financial fundamentals better. I encourage you to hire excellent financial advisors to aid you in better understanding your business whether you outsource your bookkeeping or hire an advisor to review your internal structure.

Too many law firms put all the responsibility on employees who have not been properly trained in their roles. I see the results when firms can’t pull together their financial records and after a deep dive, they begin to see problems that have been buried.

Your firm finances cannot be delegated. A major red flag is the firm with one employee who has all financial responsibility: check writing, bookkeeping, trust account, reconciliation, as well as maintains all communication with your financial partners and bank. Often, there is no ill intent on the part of the employee, there is just a lack of knowledge. And if you don’t understand the process, you will have a hard time finding the flaws in your system.

Analyze Your Cash Flow

Brenda Barnes, owner of B2 Management & Consulting, has this to say about cash flow management in law firms, “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.”

Financial Review

Brenda provides an important checklist of items for law firms to review for year-end and to strategically maximize profitability in 2022.

• Review realization rates and compare to 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 & 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 401k 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 W9’s and Tax ID numbers for issuing correct tax forms.
• Begin to think about year-end bonuses. Will you give these this year or in January?
• Look for fringe benefits you should report on W-2’s. 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 2022
• Check with your CPA on COVID-related tax breaks
• Scrub your balance sheet – verify all your account balances

Conclusion

If this is the area of your law practice that provides the most heartburn, consider taking a business financial class through your local community college or an online provider such as Coursera. Regularly meet with your financial advisors to not only talk through your business books, but for long-term financial planning. It is empowering to set financial goals for your practice and for your retirement whether you are just starting out or are quickly approaching retirement age. Setting goals and measuring results is good financial advice, doing so during a pandemic is the optimistic search for the silver lining which enables us to do things we might not have considered before.

Camille Stell is the President of Lawyers Mutual Consulting & Services and the co-author of “Designing a Succession Plan for Your Law Practice: A Step-by-Step Guide for Preparing Your Firm for Maximum Value”. Continue this conversation by contacting Camille at camille@lawyersmutualconsulting.com or 919.677.8900.