Updated: Apr 5
Get to love your numbers
If you are a lawyer doing solo, or you have your law firm and it terrifies you with just a flash of thought about financial statements, named it financial fear, then you come to the right place. “I’m confused. Those numbers make no sense to me”. You might have heard of this before from your fellow attorneys. That’s fine. When you’re getting to know someone better, you will start to love them. Our law firm bookkeeping services will help you to have a better relationship with your money and numbers. Just understand what numbers mean, and what will it be that you have to do to make it happen.
Numbers tell you what’s going on in your business. Your business numbers let you know if your business is healthy and making money. It helps you to understand the cause and effects. Something like when you do this, you get this. If you don’t pay attention to numbers, you will not love them. So, we’re going to walk you through a few top basics that lawyers often get stressed coming across.
Let’s get started, shall we?
Financial statements - Make it easy
A lot of lawyers wonder, hmm, what is it? In the old times, if you say you are rich. People may say “Show me your money!”. Well, that’s what the financial statements do. They show you the money, where it came from, where it went, and where it is now.
In this blog, Our law firm bookkeeping services will help you to understand the basics of our 2 common financial statements: Balance Sheet, and Profit and Loss.
Balance Sheet (B/S)
The balance sheet lists 3 things: Asset, Liability, and Equity.
Asset tells you what you own, things you own, your cash, and Account Receivables which is the money your clients owe you. It also shows any kind of investments you have, and big assets or physical property you have in your business such as plants, trucks, equipment, and inventory. Big assets could be something you don’t need to replace every year, something you buy to make your work easier for you or to make money for you. Assets also include things that can’t be touched but nevertheless exists and have value e.g. trademarks and patents.
Liability is things you owe. Something like credit cards, invoice payments you need to make to your vendors. Money in IOLTA or your Trust Account is also a liability. So is payroll your firm owes to its employees or taxes owed to the government.
Equity: sometimes referred to as capital or net worth. It’s the money left after you take your asset, subtract all your liability. This leftover money belongs to the shareholders or the owners of the company. Basically, equity tells you your business valuation.
We would like to stress that there are a couple of things you should pay attention to when you’re looking at the B/S. No one likes negative numbers in business. Some few exceptions e.g. accumulated depreciation account it could be negative. When you see negative numbers, it is likely that something was not recorded correctly. When you look at the equity section, you want it to be positive, like making sure you’re not borrowing more than your capacity allows.
Another important point for lawyers to pay attention to in law firm bookkeeping and accounting is when you look at B/S, in your IOLTA account area, the money in your bank or your trust account should match your liability account. If it doesn’t, we have a problem.
A little mention of AR Account Receivables. AR reports tell you who owns your money and how much. AR is the area a lot of lawyers struggle with. This is another reason why we should use software rather than create our own invoices. Quickbooks for example. When you create invoices in QuickBooks, its automation function can help to remind your clients of payment in a very professional way, helping you to track it better. Lawyers don’t want to be bill collectors. Yet, sometimes people need to be reminded of what they might forget.
Some lawyers said they were scared to death when it comes to trust account management. If you do it properly, track your records accordingly, you will be okay. You want your IOLTA account to be taken care of, that’s when accounting software comes into the picture.
Profit & Loss Statement (P&L)
What is a P&L statement? Its name tells us all. It’s about Profit and Loss statement. P&L tells you how much money you made, how much you billed your clients, how much actually came in from invoices sent out to your clients. P&L also tells you how much you spent. It could be your lawyer subscription, court fees, advertising, salary. Finally, it lets you know what is left.
Just think about your business. Why would you want to know how much money you made? Why do you need to know how much money you spent and what is left? Let us put it this way. In business, when you make more than you spend, you make a profit. When you spend more than you make, there you have a loss. It’s just as simple as that. You want a healthy business. Of course, you would want it profitable. So it’s essential that you know where to look and where your business is, otherwise you’re totally lost.
Profit and loss statement is a report that usually shows how much revenue a firm earned over a period of time. It could be over a month’s time, year-to-date.
One of the coolest things about P&L is it tells you the area where you’re spending money. You know where you’re spending too much, and you know exactly where to do your adjustment. It is interesting to see the core relation between something you do and its results.
For example, if you see you paying $300 for a LinkedIn advertising campaign last month and your income increasing from a new client of $2,000 worth of contract coming this month, then you know you’re on the right track. Especially when you have a system in place, like Quickbooks, an accounting software, it helps you to capture all information and make on-time decisions in your business.
Some lawyers avoid using accounting software. Instead, they have excel tables to run their business. Please DON’T. There is much available software that you can use. Reports will be automatically run for you just by one (or a few) clicks. Imagine going to the hospital for a checkup. You may not like to get your blood work, jump on a scale, have scans, etc. but if you don’t do those things, you could miss something out that you could have fixed. For expenses, you definitely want yours to be as low as possible. Have a look at your investments too, seeing if it brings profits if you need to flip a little bit or else.
One important thing to get in mind is Profit does not mean Cash and vice versa. You have cash in your bank. It’s great but it does not necessarily mean you have profit. For those who don’t have an accounting system in place, you may use your bank account to decide whether you should make a purchase or not. It’s not a healthy decision at all.
What is a good amount of time to look at your numbers? It depends. Based on your business status, it is highly suggested to do your check on a weekly or biweekly basis. At least twice a month to make sure you keep a good track of what is going on in your business.
When your business grows, you will be required to understand how much cash you always have in one hand and have your line. When it drops below that point, you will not freak out. Instead, you will take a look to see where the problem is and what happened. With the impact of the ongoing pandemic on the economy, this is particularly the time when cash is really important. You get to understand how much cash you have, on one hand, know your expenses, know how much you need to have, know the numbers you need to pay for the basics every month plus extra. Ideally, if you have a couple of months available, say 3 months, it will prepare you to overcome potential fluctuation.
For now, we’re not going further into other financial or accounting issues because it’s easy to get overwhelmed by numbers and names. Actually, when you understand your numbers and pay attention to your numbers, all those confusing terms start to make sense to you. Everything becomes clear & easy now, doesn’t it? Are you ready to tackle your financial statements now? Can you do it?
Irvine Bookkeeping offers a full range of bookkeeping services and promises that in 2-3 weeks, we clean up a whole book for you to prepare for tax seasons. We believe knowing your company's financial health is the key to maintaining control of your business.
As a business owner, if you see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it.
Call Irvine Bookkeeping now for a Free Quote!
#balancesheet #profitandloss #accountreceivables #IOLTA #lawfirmaccounting #lawbookkeeping #threewayreconciliation #reconciliation #trustaccount #administrative #bookkeeping #accounting #digitalmarketing #irvinebookkeeping #managebookkeeping #accounting