When it comes to law firm accounting, are your records in shape? If not, year-end is the ideal time to take a look and get things straightened out.
December is traditionally a slow month for taking on new clients and matters, which makes it a great time to close on outstanding receivables and budget for the year ahead. Beyond that, there’s some information that you’ll need to gather at year-end to make things easier on yourself come tax time.
There can be a lot to keep track of, but luckily, we’ve outlined the steps you need to take below. Be sure to follow them all to set your firm up for success in the new year.
1. Run an accounts receivable report and collect on outstanding payments
At the end of the year, it’s time to collect on any outstanding accounts.
Of course, it’s best practice to collect on all accounts receivable in a timely manner. But, for those clients that are slow to pay, making an effort to close them out in December will make things a lot less messy for you the following year.
Your first step is to run an Accounts Receivable report, which should give you any amounts outstanding on all open and past-due invoices. In Clio, this can be viewed on a per-user, per-client, and per-matter basis (see how to easily create an accounts receivable report in Clio here).
Once you know your outstanding accounts, it’s time to collect! If you have several unpaid accounts, December can be a tough month to do collections—clients are focused on the holidays and spending money on gifts, travel, and festivities. Again, it is best practice to stay on top of your collections all year round—but it’s not always possible to keep up.
However, there are a couple of positive reasons to collect in December:
- Many companies give out bonuses during the holidays. That means your client may have an additional source of revenue in December to pay your invoice. You could try giving a small discount for bills paid before year-end to encourage clients to pay you sooner.
- If you represent businesses, they are usually looking to pay all their expenses before year-end. It’s best to send bills early in December so that your clients can get on top of payments.
As an added measure, try billing every two weeks in December instead of monthly, explaining the change in your billing process with a letter. Again, most clients will understand that you’re simply being proactive and working on your business’s year-end.
Tip: Still accepting payment by check only? Start accepting online credit card payments to get paid more quickly. According to Clio’s 2017 Legal Trends Report, firms using Clio Payments get paid 39 percent faster than firms using check-based payments.
2. Review your trust accounts
On a similar note, double-check that you’ve been diligent about moving money from your trust account to your operating account as fees were earned. Also, make sure all of your client ledgers are balanced.
You can do this by running a Work in Progress (WIP) report to look for any outstanding time or expenses. (Here’s how to do it in Clio.) If you find some, invoice yourself, and pay yourself out of your trust accounts before year-end.
Once that’s done, you’ll also need to reconcile your trust accounts before the end of the year. For the uninitiated, that means checking your records against your bank statements to make sure that everything lines up.
In many states, lawyers are required to do this on a monthly basis, but some states also require annual reports. For example, in California and Florida, lawyers must report any unassigned fees (i.e., funds left over in trust accounts) at the end of the year.
Tip: If you have money in client ledgers, run each individual client ledger report and send clients a copy so they have a current record of all the transactions during the past year. This is a great opportunity to stay in touch with your current clients and show them you’re on top of things.
3. Review your revenue, expenses, and budget
To set yourself up for success in the new year, make sure that you’re properly tracking your firm’s financial information.
Here are a few things you’ll want to look at:
Actual prior year revenue/expenses: Were you in the red or in the black last year (and by how much)?
Current year budget revenue/expenses: Were you in the red or in the black THIS year (and by how much)?
Actual current year cash flow by month: How did you do on a month-to-month basis?
Current YTD actual compared to YTD budget: Compare your current year’s revenue/expense to your budget for the year. (Don’t have a budget? This is a great time to make one for next year!)
Opening and ending operating account balance: Look at your account balances on a year-to-year and month-to-month basis. How is your cash flow? Do you need to be more mindful of when expenses come up?
Profit/loss by month (which is different than the operating account balance): This is similar to the first two numbers, but it isn’t quite the same. You’ll be looking at your bottom line, which is your revenues and gains minus your expenses and losses. For most lawyers, this will still be fairly similar to your revenue/expenses, but if you’ve made a big investment in technology or hardware for your firm, it’s worth taking a look at this number too.
Accounts receivable each month: How much were you owed each month? You’ll be able to see this under your accounts receivable report.
Once you’ve got a bird’s-eye view of your firm’s finances, here’s what to look for:
- Compare your current year’s revenue to last year’s revenue, and to your current year’s budget. This keeps you aware of areas where you may be overspending, underperforming, or doing great.
- Look at the opening and ending balance of your operating account, and look for yearly trends or patterns to see if you are starting the month out with less in the bank than you thought you would be.
- Look at your total accounts receivable, and keep an eye on whether this number is growing month-to-month. If it is, you need to be more diligent with your collections!
4. Prepare for tax season
Tax season can sneak up on you faster than you think. To make sure you’re prepared, take these steps at year-end:
- Look at your “Owner’s Draw” account and make sure the entries in this account are correct. These are expenses you ran through the business as non-business-related expenses.
- Clean out the pile of receipts in your drawer/purse/wallet/car and make sure you have properly reimbursed yourself for any business-related expenses you paid on your personal credit cards or from your personal checking account.
- Review your calendar for appointments and places you traveled that were business related and make sure you have prepared expense reports for mileage.
- If you’re running your business using the cash method of accounting in the U.S., invest in tax-deductible expenses to offset your 2017 revenues. For example, consider purchasing a yearly subscription to Clio to save come tax time (you can try it for free first).
Tip: For more in-depth information on getting ready for tax time, check out our post on how to prepare your legal practice for tax season.
Key law firm accounting takeaways
To sum up, this is what you need to do to make sure your firm’s finances are in check at year-end:
- Review your accounts receivable. And collect on outstanding accounts!
- Review your trust accounts. Invoice and pay yourself for any outstanding amounts, reconcile your trust accounts, and report any unassigned fees if necessary.
- Check in on your performance. Look at how you’ve done for the year in terms of revenue compared to your budget, and compared to last year’s revenue, to get an idea of your firm’s performance. Then, set goals for the coming year.
- Get your records in order. Look through your receipts and make sure you’ve reimbursed yourself for business expenses by year-end. You’ll thank yourself come tax time!
Follow these steps, and you’ll be able to breathe easy knowing that your firm’s finances are in order going into the new year.