The Importance of Financial Statements for Attorneys: A Bookkeeper's Perspective
Aug 26, 2024As a legal bookkeeper, it is essential to ensure that attorneys have access to critical financial statements that provide insights into their law firm's economic health and performance. Here's a breakdown of the key financial statements that attorneys should review and understand:
Profit and Loss Statement/Income Statement (P&L)
We are all familiar with this statement. It is the most asked report from attorneys when considering how their firm is doing over the fiscal year. The P&L statement is vital for attorneys to make informed decisions about their firm's operations and financial future. By comprehensively understanding the firm's financial performance, attorneys can strategically guide the firm's growth and success.
Partners at a law firm review profit and loss statements to gain insights into the firm's financial health, revenue, expenses, and resulting bottom line. This information empowers partners to make informed decisions about the firm's future direction, such as expanding or reducing specific practice areas, managing staffing, or investing in technology and infrastructure.
It is understanding the firm's financial obligations, such as salaries, rent, and other expenses. Reviewing the P&L statement allows partners to ensure the firm has sufficient cash flow to meet its financial commitments. Additionally, the P&L statement helps partners identify trends and patterns in the firm's financial performance over time, enabling them to adjust operations and strategies accordingly.
Bonus tip: Be proactive! Do some calculations on how much it costs to run the firm (overhead) and the percentage of wages vs the other costs in the law firm.
Balance Sheet
The balance sheet provides a comprehensive view of the firm's assets, liabilities, and equity at a specific point in time. It is instrumental in assessing the firm's financial position and ability to cover its liabilities with available assets.
By analyzing the balance sheet, partners can evaluate the firm's capacity to meet financial obligations, such as bill payments or loan repayments. Comparing balance sheets from different periods allows partners to track changes in the firm's financial position, providing insights into growth, financial stability, and overall performance. Additionally, the balance sheet can determine the firm's value, which is crucial in mergers, acquisitions, or when considering selling ownership stakes.
When discussing the balance sheet with a client, it is essential to remind the client that the totals in this report show the balances over time. They are an accumulation of all the years the business has been open. Be ready for that statement, “I didn’t spend that much money on distributions.” when they look at the total over time.
Cash Flow Statement
The cash flow statement outlines the firm's cash inflows and outflows over a specific period, offering insights into how the firm generates and utilizes cash. It is essential for managing the firm's liquidity and ensuring financial stability.
Reviewing the cash flow statement helps partners assess the firm's liquidity and ability to meet short-term financial obligations. It provides a detailed view of the firm's cash inflows and outflows, enabling partners to make informed decisions about investments, debt management, and cash reserves. The cash flow statement also helps identify the firm's potential financial risks, allowing partners to take corrective actions.
Statement of Changes in Equity/Retained Earnings
This statement illustrates how the firm's profits are reinvested or distributed to shareholders over a specific period, providing insights into the firm's financial decisions regarding retained earnings.
In addition to these financial statements, attorneys can review other documents, such as budget projections, cash flow forecasts, and three-way bank reconciliations, to gain further insights into the firm's financial health and identify potential areas of concern.
For more in-depth information on financial statements and bookkeeping best practices, legal bookkeepers can refer to the following articles:
- Law Firm Accounting | What's In Your Firm Financial Statements
- Firm Finances: Bookkeeping, Accounting, and KPIs (2024) - Lawyerist
- Are Your Law Firms Financial Statements Useful To You?
- What Does a Bookkeeper Do? A Simple Explanation
By leveraging these resources, legal bookkeepers can enhance their understanding of financial statements and their significance in managing law firms' financial health. Want to learn more? Join our group, The Accountants Law Lab!
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A weekly podcast dedicated to helping bookkeepers, accountants, and attorneys stay up to date on financial best practices within the legal industry. Hosted by Lynda Artesani, Sarah Prevost, and Steve Libhart.
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