In January we closed out our blog post with Resolution number 10, “We will regularly evaluate our firm’s financial reports.” What does that process look like for you? Do you know how to tell if you’re making money or just getting by? What numbers should you be paying attention to? In order to help you parse through what can seem like a mountain of data, here are the four main financial reports you should focus on.
Start by setting aside some time to look 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. These are the key reports that, as a business owner, you should become intimately familiar with:
- Profit and Loss Report: The Profit and Loss report tells the story of your income vs. your expenses throughout the month. In this report, you should pay close attention to what is general overhead vs. a matter-specific expense. Knowing the breakdown of what the true cost of your work is will help you gauge your pricing and which services you promote more heavily.
- Balance Sheet: This report is the key to tracking your assets (i.e. what you have- cash, accounts receivable, etc.) and your liabilities (i.e. what you owe- bills, debt, etc.). 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.
- Cash Flow Report: The Cash Flow report is crucial to review regularly. As the firm’s owner or partner, you should always know where your cash is coming from and where it’s going. To keep your team on track in terms of collections, a best practice for any business is to use the reports above to help you establish a “Monthly Nut.” Your Monthly Nut reflects what you need to earn in order to cover your average monthly cost of business. Giving yourself and your team a cash benchmark can motivate everyone to stay on target for new business acquisition.
- Trust 3-Way Match Report: You’ve heard this before; the 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. The Trust 3-Way Match Report is a necessary tool for ensuring that your firm is in compliance with the rules and regulations for handling client funds.
Remember, 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. Keep in mind that your financial reports alone may give you the full picture of your firm’s health, but they are a great place to start. To take your monthly evaluations a step further, consider other Key Performance Indicators or KPIs like Utilization, WIP/Inventory, Billable Hours, and Collection Realization Rates. These can all help you determine whether your firm is working efficiently.
As you begin building your healthy financial review process, get together with your bookkeeper to review your Chart of Accounts. This is especially important if your books aren’t making sense. Confusion can often be caused by 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.
Don’t forget, 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.