Now that we have gotten your Chart of Accounts organized with Part I of our Summer Series, it’s time to dig into Tools for Understanding your Firm’s Profitability. Using information you already have, you can easily understand your profitability and all the pieces that go with it. All the reports we review in this post are what your CPN Legal team uses to help you understand profitability.
What is your business telling you? Your books, when properly recorded, can help you generate reports that give you answers to practical questions for your firm’s day-to-day operations. And while we know tracking revenue and expenses is important, we also know it can be complex. Many firms split out income by attorney, practice area, or location. Some firms split income and expenses by each attorney.
There are key areas for understanding your firm’s profitability, including:
- Focus on a forward-thinking mindset
- Use the information you already have, and make sure it’s organized
- Forecast cash flow
- We are doing a deep dive on cash flow in Part III of our Summer Series, make sure to stay tuned
- Know your Work in Progress (WIP) and your Realization Rates and how they impact profitability
- Learn to like your budget and use it
Let’s break down where to look for the information you need to make good decisions for your business.
- Reports to review each month:
- Profit and Loss Report (also called P&L or Income Statement)
- Balance Sheet
- Accounts Receivable Aging
- Trust 3-Way Match Report
- Trust Balances by Client
- Key Performance Indicators, including:
- Billable Hours
- Billing Realization / Collection Realization Rates
- Other Reports to Review:
- Cash Flow Report (remember, more to come in Part III!)
- Work in Progress – Future revenue
- Expense Detail
- Owner Draw Detail
Have a question you aren’t sure how to use your books to evaluate?
Don’t forget, you don’t have to navigate your books alone. CPN Legal has 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.