Tackle Your Fears About Law Firm Accounting

Updated: Aug 30, 2021

Love your numbers because healthy numbers mean productivity

Get to love your numbers

If you are a lawyer doing solo, or you have your own 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. We will help you to have a better relationship with your money and numbers. Just understand what numbers mean, 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 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 it. 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

Law firm accounting may be difficult at first but difficult roads lead to beautiful destinations

A lot of lawyers wonder, hmm, what is it? In the old times, if you say you’re 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, we 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.

Law firm accounting

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 when you look at B/S, at 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, help 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)

P&L is not as hard as you assumed

What is a P&L statement? Its name tells us all. It’s about Profit and Loss. 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.

P&L 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, 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, you see you’re 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 where 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.