Ready for a financial checkup? It’s the end of August, and you are sitting down to reconcile your bank accounts for July’s activity. This is an exercise you do every month (or should be doing). But are there things you may be overlooking in the hustle and bustle of operating your law firm? It’s not enough to be in the mindset of “money in the checking account = life is good.” To get and keep your firm on the path to prosperity, you must run a profitable enterprise and continue to adjust to get your firm on solid financial footing.
Understanding which key metrics you should track and measure in your midyear financial checkup is critical to remaining profitable as a solo and small firm attorney. This time of the year, with half the year’s numbers in the books, is a good time to evaluate the numbers on your “financial dashboard” before plowing through the rest of the year. While the retail and resort industries tend to make up most of their earnings in Q4, law firms often lose ground during this period due to the holiday season, staff time off, and slower court schedules. Now is the time to get a jump start on your finances and get ahead of your 2022 needs.
What should mass tort firms be tracking?
Knowing what to track in a financial checkup is important. As contingency fee law firms, mass tort practices often wait years to receive payment for their work. And while the typical personal injury case can take up to two years or more to reach a resolution, there are sometimes post-settlement delays, including lien resolution and client bankruptcies, that must be resolved before your firm receives settlement monies. Due to these unique challenges, mass tort firms must stay on top of their finances. In the same way, you track your marketing and advertising dollars and case inventory like a hawk, the same should be done for key financial data. Below are some items that deserve a critical “legal” eye:
- Confirm your accountant (in-house or contract) provided year-end adjustments, and that they are posted.
- Make sure your checks, receipts, and bank reconciliations are up to date as of right now and keep them up to date for the rest of the year.
- Assure that all trust transactions are entered into your trust accounting system and that they are reflected on the midyear financial checkup.
- Review the corrections you made last year and correct the same items now for this year.
Some examples are:
- Payroll allocations – Confirm entries are posted correctly to the salary and payroll tax expense accounts.
- Large purchases – Did you buy any laptops for remote workers? Any plans for large purchases before year-end? If so, consult with an accountant to determine if those items should be allocated as an asset or an expense.
- Line of Credit payments – A common error is the improper allocation of payments to principal and interest.
- Credit Card payments – Confirm the payment is allocated to the various expense accounts (i.e. supplies, travel, meals, etc.). A lot of effort is wasted reviewing the statements after-the-fact to properly correct and reclassify the transactions. Making the effort now will save precious time in December and January.
- Meals – Speaking of meals, do you understand what is considered a tax-deductible meal? If you’re unsure where certain expenses fall, ask your accountant now to correctly post the transactions in the correct expense accounts.
- Vendor Payments – Do you have W9 forms so you can easily prepare the 1099s?
Does your firm have enough funds to weather a significant downturn?
One of the many lessons learned from the COVID-19 pandemic is that law firms must be prepared for significant downturns in the economy and prioritize savings to ride out a wide range of financial scenarios. While U.S. law firms tend to weather downturns better than the overall economy, mass tort firms are unique in that it takes a significant number of resources to get cases from intake to resolution all without charging clients upfront costs. Many financing and post-settlement products allow increased financing as your case inventory grows but it takes money to make money. The good news is that during downturns, transactional practices tend to contract since companies are more cautious about mergers and other business dealings, but litigation practices tend to remain steady. Despite this silver lining, we have seen massive delays in mass tort cases progressing through the tort system. Even a delay of 3 or 4 months will push back the resolution of your claims and the compensation you need to keep the lights on which is why financial checkups are important.
If your firm does not have a business savings account, you should talk with your banker about opening one as soon as possible. Use this account to set aside extra funds to cover unforeseen expenses, taxes, and emergency costs. Having a surplus of cash will also increase your chances of getting approved for a business loan if you happen to need one in the future. Consider a Money Market savings account that can generate more substantial interest income. You can also use an automatic “sweeping” function to shift funds to your regular business/operating account when that account falls below a certain level to ensure you keep enough money in your main firm account and avoid any overdraft fees.
What else can you do to stay ahead?
Learn from the past – Take time to review last year’s financial performance for areas of weakness you don’t want to repeat this year. Did the firm meet its profit goals? If not, why not? Which practice areas reported negative revenue growth? How did the firm actual results compare to the budget?
Create a realistic 2022 financial model – Sound financial management starts with the preparation of a monthly budget or financial plan. Determine monthly expenses by functional categories such as compensation, payroll taxes, other personnel costs, rent, professional expenses, professional development activities, technology, and other operating expenses. Subtract expenses from revenue to determine budgeted net profit. Then compare budget to actual results on a monthly and year-to-date basis.
Make paying off debt a priority – As a business owner, having a large amount of debt can be very stressful. However, if you can pay at least some of it back every month, you’ll be moving in a positive direction. To reduce debt, create a strict business budget, decrease expenses, and negotiate when necessary. By doing this, your business will make significant financial progress.
Find the leaks – Take steps to identify the reasons for any revenue shortfalls or low-profit margin. Potential problems might include excess capacity, fee discounts, inefficiency write-downs, fee write-offs due to client perception of value, and failure to control expenses.
Reviewing key financial management reports throughout the year – Successful firms monitor financial results on at least a monthly basis during the year. Key reports include a monthly budget, profit/loss statement, balance sheet, cash receipts report, active case inventory report, and aged A/R report.
The financial goal of a law firm is to maximize profits. To maximize profits, you need a financial plan that will help you measure progress and signal potential problems. What are the numbers telling you? Are you on the way to a profitable year or are there issues you need to address? Asking the right questions now will help you succeed later. If you need help reviewing your firm’s financial results, look to a CPA that specializes in helping law firms manage the financial side of the practice.
Get more training for you and your support team on the aspects of having a successful mass tort practice. Visit the Mass Tort Academy for access to our free courses and our Practice Management Series.
Written by Jerise Henson
About the Author
Jerise Henson is the Academy Content Writer at The Mass Tort Institute. She has served in numerous roles in mass tort firms from case manager to paralegal and director of client services. She is passionate and dedicated to improving education and training for allied professionals in the mass tort industry