Why Financial Reporting is Critical for Your Law Firm
Accounting is a major part of your law firm. Each day you work with clients and their accounts to track more than the ins-and-outs of their cases; you are also in charge of continuously tracking the firm’s cash flow to ensure profitability and client trust. It is essential that you understand basic and effective accounting procedures, in addition to how financial reporting influences your internal and external operations.
While Accounting Girl is happy to be your very own legal accounting partner and superhero, fighting the crimes often associated with financial reporting as your virtual CFO, nothing compares to having your own knowledge of why financial reporting is critical for your law firm. As it is said, “Knowledge itself is power.” So, the greater understanding you have about what elements of financial reporting are critical for your law firm, the more time your firm will have to develop and produce trust and profitability with your clients.
As a Lawyer, What Should You Know About Financial Reporting?
Beyond basic vocabulary and terminology, there are a few key items of knowledge that will take your law firm a long way. This includes management reports which can include income statements for revenue and expenses, balance sheets that outline your firm’s assets and liabilities, Trust reports listing client retainer balances, and so on.
First, there are your general income statements (aka Profit & Loss statements) that outline how much revenue and expenses your company produces over a certain amount of time, whether monthly, quarterly or annually. Broken down even further, these allow you to determine the specific fees that are associated with the various practices you focus on and compare the revenues and expenses paid for each.
Second, there are balance sheets that provide a stronger overview of your financial standing, including what is owned, owed, and what holds value through interest. The top half of a balance sheet always outlines what assets exist for the company. While the bottom half outlines both liabilities owed by the company, and equities that detail owner contributions.
These elements and others are what create the overall picture of your firm’s financial report. Drilling into these types of reports allow you to see how effective your current performance is for your clients, what positive and negative trends exist within your firm, and what changes can be made to improve future outcomes.
So, What Are the Positive Outcomes of Financial Reporting?
Once you have a basic understanding of your firm’s financial matters, you will find that your entire business will start to run more smoothly and your clients will be impressed with all the additional time you have to focus on their cases.
This includes having the ability to create management and operational reports using various spreadsheets and accounting software, like QuickBooks Online, that help outline current and potential growth factors that lead to success. How? Unlike the former days of accounting, where reports were primarily done with a pencil and paper, the technology available now is designed to ensure that accounting methods are done in less time, producing greater results, and are far simpler to understand and manage for the everyday business person.
It also means that you and your associates will have the capability to truly comprehend, inquire about, and apply the information provided in your firm’s financial reports at any point in time. It means that you will be able to move through a conversation with your accountant with greater ease, and truly understand what you need to do to make essential changes that lead to greater profitability and growth now and in the future.
With this information, you will also be able to benchmark your financial status and future outcomes with those of other law firms, to determine what you and the competition are doing alike and what will set you apart. To analyze your current numbers effectively enough to determine why certain areas of your practice are more successful and why others dwindle, and whether any of your current prices should increase or decrease to bring in more profitability or clients. Lastly, and perhaps most importantly, your ability to benchmark your practice against other law practices can potentially lead you to tackling client cases and litigations with greater success, and less financial stress for your clientele.
What Resources Can Help You Grow?
Not sure where to start to improve your knowledge about financial reporting for your law firm? While you could spend countless hours researching across the web, you will get more out of focusing on some key resources about financial reporting information.
Know your software – There are lots of great software platforms out there, such as QuickBooks Online. See which software will fit your business needs, then practice, practice, practice.
LexisNexis – A great resource for law firms to utilize, LexisNexis has thousands of FREE articles from reputable international journals that focus on legal solutions, news, and business insights.
The American Bar Association – You don’t need a membership to find useful publications about financial reporting. Check out the Law Practice Magazine’s archives on your computer or smartphone, to find useful articles like “Your Financial Dashboard” that provides practice solutions for your law firm.
Still have questions about financial reporting?