Thinking about handling law firm financial management might be scary. Why? Because it is not your role as a lawyer to be a financial whiz!
These days there is a done of software that assists with financial planning, practice management, and law firm profitability.
There is no excuse for not being able to manage trust accounts properly or to have a ton of accounts receivable these days.
Here are some things that this article will touch on:
● Creating a law-friendly plan
● Choosing the right credit card
● Reviewing the financial growth
Honestly, it can be a lot of additional information to understand and apply to your firm.
But, taking the initiative to do so will go a long way toward putting your company on the road to long-term revenue growth.
Moreover, effective financial management will help your law firm stabilize revenue to help more clients!
Here’s what you need to know…
Financial Management Introduction
Law firm financial management includes directing and redirecting all the finance-related activities of the organization.
It involves the following:
● Planning or Designing
● Organizing or Categorizing
● Directing or Managing
● Controlling or Guiding
Law firm financial management deals with all the financial decisions needed to ploy and conduct for the firm’s revenue and growth.
Law Firm Financial Management – Understanding
The creation of a successful law company needs its lawyers’ involvement in terms of the whole planning and directing process.
So, let’s understand financial management better to increase the cash flow in your firm:
Lay The Financial Foundation
It goes without saying that creating a law firm business plan comes first in understanding financial management.
A budgeting plan is the main thing that decides the firm’s cash flow, earnings, and profits. Here are some helpful tips:
Know Your Firm’s Expenditures
While you’re at it, you might want to list down the expenses for future planning:
✔️ Bar Union Dues
✔️ Resource Handling (Equipment maintenance, utilities, etc.)
✔️ Bar Courses (Changing laws and trends)
✔️ MCLE Subscriptions
✔️ Business Marketing (Digital or traditional)
And the list goes on. Of course, you can add as many things as you want because the final expense list depends on your law firm’s operation.
Set Firm’s Money Goals To Manage Finance
Now that you know your firm’s expenses, it’s time to figure out how to manage them within the budget.
Your budget will set the base to create goals that are in line with your firm’s income.
Further, the financial goals will allow the firm to follow a set statement and thus avoid spending anything extra and unnecessary.
In fact, a well-curated budget plan will help your firm be on the right revenue-generating path for ideal profitability.
Create A Plan That Pays You First
As a lawyer, having a cash flow plan is critical since only then can your firm assist its clients.
Profit First by Mike Michalowicz can be a great guideline to take the initiative as he has a simple yet solid money-making UCP that is Sales-Profit = Expenses!
You can also apply the “Rule of Thirds” (One-third to employees/taxes/benefits, One-third to profits, and one-third to remaining bills) to your law firm.
The key is to think through everything that can require spending money in the future to have the finances pre-planned for it.
Manage Financial Records Wisely
It is wise to have dedicated financial accounts for your firm when it comes to good law firm financial management.
Managing the financial records wisely offers the following benefits:
A firm can have a clear picture of its earnings, profits, and losses
The management can make sure the company is not lacking behind on any of the tax/utility bills
Financial records management is frequently a primary task in law offices.
Because such records are utilized for so many things in the office, the loss or misplacing of even one might be a problem.
Design A Work Procedure Manual
The procedure manual should outline precisely how things should work at your law company to ensure consistency and efficiency in the firm.
The right manual can help your law firm grow by increasing the productive days of the employee lawyers.
● You can hire experts to create a law office procedure manual to be sure everything is updated and aligned with the business laws
● The manual must include every little to major information. For instance, it should explain the staff hiring process, time tracking, client gathering, etc.
Stay Updated With Financial Reporting
Lawyers put forth a lot of effort to become experts in their industry, learning a lot of information, vocabulary, and concepts about the law field.
Understanding the law firm’s financial management can help attorneys become good to the best lawyers in the industry.
Emery Wager explains that a law firm should prioritize its basic statements to make wise business decisions.
Here’s a breakdown of the essential financial statements you need to understand:
1. P & L Statement
It is a financial statement of a law firm that sums up the revenue, charges, and expenses over a fiscal quarter or year.
This report is particularly beneficial because it demonstrates a company’s financial health, growth, and profitability.
Pro-Tip: List your client deals and firm expenses to analyze if your firm is earning a profit or at a loss.
2. Balance Sheet
It is a financial statement that defines your firm’s liability, shareholder’s ownership, and reported assets.
A law firm balance sheet is vital to evaluate the financial worth of your business.
3. Cash Flow Report
According to Investopedia, a cash flow report shows what goes in and out of your company’s finances.
Understanding your company’s cash flow statement can help you determine how much money it makes and how much it spends.
Law firm financial management is complex. It requires a solid understanding of the topic, even for experienced lawyers.
As a lawyer, you don’t need to be a financial expert to be successful. But understanding the basics of financial management will go a long way in ensuring that your firm enjoys sustainable growth and cash flow.
Understanding Financial Management for Law Firms
Law firm financial management covers the planning, directing, organization and control of the financial operations of your law firm. This includes tracking expenses, income and profitability to predict future growth and create strategies for your firm’s future activities.
Law firm financial management is easily separated into a few key categories which we’ll explore below.
Law Firm Financial Management – Create Budgets
The first step to boosting your firm’s financial performance and improving its cash flow is to create realistic budgets.
Budgets lay the foundations for your revenue growth and profitability over time.
You can find guides on how to create budgets for your law firm online, or work with a financial expert to help you create sustainable budgets based on your firm’s data and income reports.
Analyzing Your Profitability
Profitability analyses are an essential practice for law firm financial management and cost accounting. These analyses are assessments of your firm’s output’s profitability over time.
Output refers to the services and products that a firm produces, which in your case would refer to the legal services you offer and the billable hours of services provided.
Other data that support profitability analyses include realization rates and utilization rates. These rates offer a strong starting point in determining the overall profitability of the services offered by your law firm.
Profit Center Accounting
Profit centers are components of an organization in which revenues get accounted for on a separate basis. It enables you to assess the profits of the internal departments of your firm individually.
This accounting method is particularly appropriate for larger law firms with multiple areas of practice, such as family law and corporate law. These larger firms can use profit center accounting to separate these areas of their businesses into separate profit centers, as the requirements for these areas of business vary considerably.
Planning for the Long Term
Every law firm needs to perform long-term financial planning to secure long-term revenue earning opportunities, pay off loans and debts, and grow.
Your cash flow timing will determine which of your activities you should include in your short-term and long-term plans. Typically, if it spans over the course of a year or longer, it should get added to your long-term plan.
It can be challenging for law firms to determine the time frames for long-term planning. This is where forecasting becomes essential.
Forecasting enables you to identify the most likely financial outcomes for your firm using a combination of industry reports, historical data, and the guidance of a financial expert specializing in law firm finances.
Your firm should document its long-term financial strategies and profitability models carefully. Short-term plans and budgets should support these strategies for the best results.
Using a financial strategy template will allow you to start creating realistic short-term and long-term strategies for your firm.
Crafting a Financial Plan that Works
Your firm’s financial plan should include your long-term financial goals and the strategies you will use to achieve them. These plans should include as much specific and accurate financial data as possible, along with the data for your first year of operations.
Your financial plan should include:
Your financial projections. Include the volume of cases you expect to be able to take on, and how much you will charge clients. Structure your projections of what you will earn with historical data and other information.
Monthly revenue projections and goals. This pertains to how much money you aim to make on a monthly basis. Bear in mind that some months will yield higher income levels than others due to your areas of practice, key market factors, and client trends.
Concise budgets. Your budgets will provide a detailed breakdown of your firm’s expenses and where this expenditure is focused.
Cash flow statements. This pertains to what you currently earn each month, as well as your monthly expenditures. This data should get updated regularly.
It’s also essential to review and update your financial plan on an annual basis. Remember that your financial plan should be realistic and accurate rather than overly ambitious and optimistic.
Carry out research to ensure that you have reliable evidence and industry benchmarks to support your projections and estimations. Documents like the annual Legal Trends Report offer average utilization rate projections by region and other helpful data to ensure that you can create sustainable financial plans for your firm.
Monitoring Your Firm’s Performance
Data from law firm key performance indicators (KPIs) can help you to monitor the financial performance of your firm. Some of the most commonly used KPIs in the industry include:
- Realization rates
- Revenues billed per month
- Revenues collected per month
- Collection rates
- Firm debt volumes
- Current run rates
- Anticipated annual expenses
- The difference between your current run rates and current anticipated annual expenses
- Operating account balances
- Ages of accounts receivable
- Amount of AR outstanding
- Net income as a percentage of total revenues
Tax Reporting
Your firm’s tax filing requirements will vary depending on the structure of your business.
Contact your local tax authority and find valuable resources and financial experts to ensure that your firm remains compliant with regional tax laws at all times.
Law Firm Financial Management in a Nutshell
Law firm financial management is simplified with the help of industry resources, financial plan and budget templates, and the guidance of skilled financial experts.
Drawing up budgets, creating long-term plans, and using KPIs to monitor your firm’s performance will help to ensure that you manage your finances sustainably and ensure strong future growth.
Law Firm Financial Management Bottom Line
Legal software and tech made the legal industry much better. These days you can easily run a law practice online, and keep track of your billable hours. Below are some things that software can do to help you run a successful law firm:
- Keep track of legal professionals bookkeeping
- Manage partner compensation in a transparent way
- Easily take retainers
- Manage your firm’s tax planning and year-end
- Provide an income statement or other financial information to the bank if you need a short-term loan
- Streamline the staffing of your law firm
- Offer legal services online
As you can see above, practice management software is a must for running a firm.
That’s it from our side on everything about law firm financial management!
We hope this guide will help you better understand your law firm’s finances to create a business plan for its growth and profitability.