Not sure if you’re making money or just getting by? Too many business owners overlook their most important asset: their data. Your firm’s books contain your formula for success. Spending real time reviewing and understanding your metrics and reports each month can go a long way towards helping you see the big picture.
Get in the habit of looking at your books each month. When we say “look at your books” we are not talking about just taking a glance at your bank account balance. There are some key reports that, as a business owner, you should become intimately familiar with:
- Profit and Loss Report: This report is important because it tells the story of your income vs. your expenses throughout the year. In this report, you should pay close attention to what is general overhead vs. a matter-specific expense. This information should be used to help you gauge your pricing and which services you promote more heavily.
- Balance Sheet: This report helps you keep track of your assets and your liabilities. You need to know where your firm stands in terms of your outstanding debts. Use the Balance Sheet to help you determine if a new investment makes sense for your firm.
- Trust 3-Way Match Report: Mishandling of Trust Accounts is the number 1 cause of disbarment in the United States. If you are not regularly auditing your accounts, start today! Never forget that the accounting requirements of law firms are unique.
- Cash Flow Report: You should always know where your cash is coming from and where it’s going. A best practice for any firm is to use the reports above to help you establish a “Monthly Nut.” Your Monthly Nut reflects what you need to cover your average monthly cost of business. Giving yourself a cash benchmark can help you stay on target with your goals for new business acquisition.
Be aware that your financial reports alone may not give you the full picture. There are other Key Performance Indicators or KPIs that you should consider tracking. Utilization, WIP/Inventory, Billable Hours, and Collection Realization Rates can all help you determine whether or not your firm is working efficiently. For example, you could be working a ton of billable hours but if your collection rates are low, you are leaving a lot of money on the table. The same is true of utilization, if you aren’t using your team to its fullest potential, then your Cost of Goods Sold automatically goes up. Make no mistake, even if you do not sell a physical product, there is always a cost to the firm associated with each case. Some costs are easy to see, like court fees or billable hours for attorneys or paralegals. But for other team members like salaried support staff, the costs are not. If a salaried staff is only assisting 3 clients, your is higher per client than if that same staff member were assisting 5 clients.
You just took your first real look at your books and maybe they’re a bit of a mess, so what now? Get together with your bookkeeper to review your Chart of Accounts. If your books aren’t making sense, it may be because of how your general ledger accounts have been categorized. Your bookkeeper can help you understand why Client Trust/IOLTA Funds are a liability and not to be treated as income. Once you’ve gotten your Chart of Accounts straightened out, run your reports again and you’ll likely find them much easier to understand now.
Thankfully, you don’t have to navigate your books alone. CPN Legal has some great resources to help you build your reports and to understand them. In understanding your data, you have a better idea of what steps to take next to help your business grow and thrive.